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Essentials of Distribution 



Essentials 

of 
Distribution 



by 
Paul D. Converse 

Professor of Business Organization and 
Operation, I'n'wersity of Illinois; Au- 
thor of Marketing Methods and 
Policies, Selling Policies, The 
Elements of Marketing, etc. 



NEW YORK 
PRENTICE-HALL, INC. 



COPYRIGHT, 1936, BY 
PRENTICE-HALL, INC. 

ALL RIGHTS RESERVED. NO PART OF THIS BOOK MAY BB 

REPRODUCED IN ANY FORM, BY MIMEOGRAPH OR ANY 

OTHER MEANS, WITHOUT PERMISSION IN WRITING FROM 

THE PUBLISHERS. 

First Punting .... June 1936 
Second Printing .... June 1937 
Third Printing March 1946 

Fourth Printing. .February 1947 



PRINTED IN THE UNITED STATES OF AMERICA 



To MY FORMER TEACHERS 
C. J. H. 
G. D. H. 

AND THROUGH THEM TO THE TEACHERS OF AMERICA 



Preface 

1 I 'HIS volume attempts to condense and simplify the 
JL principles of market distribution for the use of stu- 
dents beginning the study of distribution and of persons 
engaged in business who want a comprehensive view of 
the field of distribution. It contains a discussion of dis- 
tribution costs, distribution functions, distribution of 
selected commodities, the operations of various types of 
middlemen, and the principles of merchandising, sales- 
manship, sales management, and advertising. The treat- 
ment of so many subjects in a volume of this size 
requires that each be discussed briefly. It is hoped, how- 
ever, that the material presented will give the reader a 
clear picture of the ground covered and perhaps stimu- 
late him to further study in the field. 

PAUL D. CONVERSE 



Contents 



PAQJB 

PREFACE vii 

CHAPTER 

1. MEANING AND COST OF DISTRIBUTION 1 

Interest in marketing; Distribution a part of business; 
Market distribution a part of economics; Object of distri- 
bution; Methods of studying distribution; Advantages of 
functional approach; Advantages of commodity approach; 
Advantages of middleman approach. Cost of Distribution 
Cost of production and distribution: Illustrations; Total 
cost of marketing; Why are marketing costs so high? 
Transportation as an element in marketing cost; Service 
as an element in cost; Have marketing costs increased? 
Marketing costs should be reduced. 

2. WHAT MARKETING INVOLVES MARKETING FUNC- 

TIONS 15 

Functions or services involved in distribution; The mar- 
keting functions. Buying Buying function analyzed: 
Determining needs, Finding sources of supply, Negotiating 
terms, Obtaining title. SellingSelling function analyzed: 
Creating demand, Finding buyers, Giving advice, Negoti- 
ating terms. Transporting Goods moved by owners and 
agents; Methods of transportation; Our transportation 
system; Cost of transportation; Services rendered by rail- 
roads: Liability of common carriers, Bills of lading, De- 
murrage, Reconsignment, In-transit privileges, Suggestions 
for improved service; Services performed by motor trucks; 
Services of passenger automobiles. 

3. MARKETING FUNCTIONS (CONTINUED) .... 33 

Storage Storage creates time utility; Influence of storage 
on prices; Storage supplies seasonal demands; Reserve 
stocks ; Costs of storage ; Kinds of storage : Quick freezing ; 
Improved methods of transportation and production lessen 
need for storage; Where should goods be stored? Freight 
rates; Who should store goods? Storage facilities; Public 
warehouses: Services of public warehouses, Liability of 



x Contents 

CHAPTER PAGE 

3. MARKETING FUNCTIONS (CONTINUED) (Cont.) 

public warehouses, Charges of public warehouses; 
Government-licensed warehouses. Packing. Standardizing 
Uniform standards; Wastes caused by lack of standards. 
Grading. Assembling. Dividing. Financing. Risking 
Why risks are assumed; Shifting risk; Guarding against 
risks; Risk increases marketing costs. Recording. Man- 
agement. Concentration and dispersion. 

4. MIDDLEMEN, TRADE CHANNELS, AND COMMODITIES 56 

The middleman approach; Kinds of middlemen: Mer- 
chants, Functional middlemen; Trade channels: Manu- 
factured goods, Trade channels illustrated, Factors 
determining the trade channel, Sale in same stage of dis- 
tribution, Integration, Limitations on integration ; The 
commodity approach : Basis of classification, A classifica- 
tion of commodities, Farm products, Industrial goods, Con- 
sumers' goods, Convenience goods, Shopping goods, Wagon 
goods, Bulk goods; Organization of material. 

5. BROKERS AND OTHER AGENTS 72 

The agent; The broker; The sales agent; Buying; Resi- 
dent buyers; Commission merchants; Manufacturers' 
agents; Types of brokers; Volume of brokerage business; 
Paid for their services; Functions performed by brokers; 
Place of brokers in trade channel; Operation of brokers; 
Earnings of brokers; Advantages of brokers' selling func- 
tion: Service to small producers, Advice; Cost of brokers; 
Disadvantages of brokers; Social value of brokers; Com- 
mission merchants. 

6. AUCTIONS, EXCHANGES, AND SPECULATION ... 86 

Auctions Two kinds of sales; Characteristics of public 
sales; Functions of public sales; Importance of auctions; 
Types of auctions; The fruit auctions: Position in trade 
channel, Charges; Value of auction company's services. 
Commodity Exchanges Exchanges distinguished from 
auctions; Products handled; Call and continuous markets; 
Spots and futures; Future trading. Speculation Marginal 
dealing; Short selling; Evils of speculation; Hedging; 
Hedging illustrated; Advantages of hedging, 

7. WHOLESALERS 103 

Wholesaler defined; Place in trade channel; Usefulness of 
wholesalers; Volume of wholesale trade; Types of whole- 



Contents xi 



7. WHOLESALERS (Cont.) 

sale middlemen listed by Census; Wholesale merchants; 
Goods handled; Ownership; Territory; Method of opera- 
tion; Functions performed; The service wholesaler; Stor- 
ing; Buying; Dividing; Selling; Specialty salesmen; 
Credit; Delivery; Cash-carry wholesalers; Truck whole- 
salers; The drop shipper; The mail-order wholesaler; 
Semi-jobber; Mutual wholesalers; Operating expenses; 
Expense and size; Location; Private brands; Advantages 
of private brands: Control, Quality, Price; Disadvantages 
of private brands; Conclusion on private brands; Future 
of the wholesaler. 

8. RETAILING 127 

Functions of retailers; Volume of retail business; Types of 
retailers; Basis of operation; Location; Integrated and 
non-integrated stores; Basis of study; Expenses; Reasons 
for variations in expenses; Size of stores; Operation of 
very small stores. 

9. INDEPENDENT STORES 143 

The independent store; Common problems of small stores; 
Rural and city markets; Location; Rural stores; Advan- 
tages of rural stores; Disadvantages of rural stores; Shop- 
ping and convenience goods; Conclusions on rural stores; 
Trading center stores; Down-town city stores; Degree of 
specialization; Competitors; Advantages; Disadvantages; 
Neighborhood and suburban stores; Automobile trade; 
Vending machines; Self-service stores. 

fO. DEPARTMENT STORES AND MAIL-ORDER HOUSES . . 163 

Department Stores Definition; Importance; Organiza- 
tion; A woman's store; Service; Competitive advantages 
of the department store: Buying power, Convenience of 
a single store, Advertising, Location, Cut-priced leaders; 
Competitive disadvantages of the department store; Prob- 
lems of the department store: Management, Abuse of 
service, Expense. Mail-Order Houses Types of mail-order 
sellers; Growth of selling by mail; Goods sold; Low prices; 
Volume of mail-order business; Advantages of selling by 
mail; Disadvantages of selling by mail; Decline in mail- 
order business. 

11. CHAIN STORES 183 

Definition; Types; Importance; Organization; Expenses; 
Advantages of chain stores: Cost of goods, Selling prices, 



xii Contents 



11. CHAIN STORES (Cont.) 

Expenses, Limited service, Efficiency, Stock turnover, No 
inherent advantage from efficiency, Advertising, Location, 
Cut-price leaders; Limitations and disadvantages of 
chains: Hostile public opinion; Conclusions on chains. 

12. MEETING CHAIN COMPETITION 202 

What the independent merchant can do to meet chain com- 
petition; Individual action; Price leaders; Service; Col- 
lective action; Advertising; Supervision; Research; 
Buying; Types of organizations; The buying club; 
Retailer-owned wholesale 1 house; Disadvantages of the 
retailer-owned wholesale house; Mutual wholesalers; 
Wholesaler-retailer cooperative chains; Importance of 
cooperative chains in the grocery trade; Prices; Coopera- 
tive drug and hardware chains; Group buying; Selection 
of goods; Lower prices; Other forms of collective action. 

13. MARKETING INDUSTRIAL GOODS 221 

Industrial goods; Kinds of industrial goods; Overlapping 
with consumers' goods; Equipment; Obsolescence; The 
buyers; Sales methods; Types of middlemen; Supplies; 
Coal; Quality of coal; Marketing coal; Sales methods; 
Wholesalers; Sales agents; Raw and partly finished goods; 
Steel; Marketing methods; Steel jobbers; Fabricated 
parts; Who controls the purchase of industrial goods? 
Finding the buyer; Type of salesman needed. 

14. SELLING SERVICE 239 

Meaning of service; Kinds of services; Importance of serv- 
ice; Selling services and selling goods; Advertising; 
Publicity; Selling entertainment; Selling professional serv- 
ices; Other personal services; Selling transportation; Sell- 
ing electricity; Selling gas; Selling telephone and telegraph 
service; Selling thrift; Selling lodgings. 

15. MARKETING FARM PRODUCTS 253 

The nature of farming; One-crop versus mixed farming; 
Farm income; Concentration and dispersion; Farm prod- 
ucts as raw materials; Farm products as consumption 
goods; Marketing methods; Farm products sold for local 
consumption; Shipment by truck; Rail shipment; The 
supply of farm products; The demand for farm products; 
Prices of farm products; Control of supply; Shifting pro- 
duction; Forecasting prices; Production cycles; The co- 



Contents xiii 



15. MARKETING FARM PRODUCTS (Cont.) 

operative marketing of farm products; Types of coopera- 
tives; Objects of cooperatives; Reducing marketing cost; 
Pooling; Increasing demand; Stabilizing prices; Monopoly 
prices; Prices paid and received; Farm relief; Early forms 
of relief ; Tariffs ; Farm Board ; Subsidy ; Debenture plan ; 
Domestic allotment plan: Corn-hog contracts, Who pays 
the tax? Benefits of the AAA; Do we need permanent 
control of agricultural output? 

16. MARKETING GRAIN AND LIVESTOCK 279 

Grain Chief grains; Grain belts; Wheat; Kinds of wheat; 
Production of wheat in the United States; The country 
marketing of wheat; Types of elevators; Operation of 
elevators; Sale of gram by elevators; Terminal marketing 
of grain; The price of wheat; Cost of marketing wheat; 
Production of corn; Uses of corn; Price of corn; Coop- 
erative marketing associations. Livestock Production of 
livestock; Consumption of meat; Livestock sections; Con- 
centration of livestock; Older methods of marketing live- 
stock; Newer methods of marketing livestock: Truck 
shipments, Concentration yards, Direct marketing; Central 
markets; Commission men; Buyers of livestock; Reship- 
ment of stock; Yard traders; Cost of marketing; Prices; 
Corn-hog ratio; Use of corn-hog ratio. 

17. MARKETING DAIRY PRODUCTS 301 

Valu'o; Perishability; Production; Demand; Marketing 
fluid milk; Concentration of milk; Dispersion of milk; 
Cooperative associations; Price; Basis of paying farmers: 
Flat price, Classification plan, Base-surplus plan; High 
prices; Proper price basis; Other factors; The consumer; 
Cost of marketing milk; Marketing butter; Trade chan- 
nel for butter; Cost of marketing butter. 

18. MARKETING COTTON 315 

Consumption; Demand; Production; Financing the 
growers; Kinds of cotton; Price; Country marketing of 
cotton; The cotton gin; Country buyers; Factors; Cotton 
merchants; Cooperative marketing associations; Reducing 
marketing expenses; Orderly marketing; Pooling; Purchase 
of cotton by the mills. 

19. PRICES, MARK-UPS, AND MARGINS 327 

Importance of selling prices; Factors affecting selling 
prices; Customary prices; Odd and even prices; Quantity 



xiv Contents 

CHAPTBE PAGE 

19. PRICES, MARK-UPS, AND MARGINS (Cont.) 

prices; Leaders; Theory of using leaders; The one-price 
policy; Determining selling prices; Mark-up; The correct 
method of figuring mark-up; What is cost? Mark-downs; 
Margin; Determining the mark-up percentage; The deal- 
er's total margin; Effect of mark-downs; Replacement 
costs; Variation in margins; Average margins. 

20. OPERATING EXPENSES 344 

Expenses; Rent on owned buildings; Interest; Classifica- 
tion of expenses; Form of operating statement; Variation 
in expenses; Services rendered; Operating efficiency; 
Method of measuring efficiency; John Smith as an ex- 
ample; What Smith finds. 

21. SOME TESTS FOR MERCHANDISING EFFICIENCY . . 357 

Tests for efficiency; Volume of sales per person; Employ- 
ees perform different services ; Sales per salesman ; Average 
sales per person; Irregular sales; Better salesmanship; 
Sales training; Pay; Size of sales; Store arrangement; 
Rent ; Location ; Sales per square foot ; Customer frontage ; 
Uses of capital; Collection period; Collection percentages; 
Bad debts; Choosing the best credit policy. 

22. STOCK TURNOVER 373 

Meaning of stock turnover; How stock turnover is com- 
puted; Advantages of rapid rate of stock turnover; Re- 
duced expenses; Reduced mark-downs; Reduced margins; 
Increased profits; Illustrative figures; How to increase rate 
of turnover ; Decreasing stock ; Small-order buying ; Carry- 
ing fewer articles; Danger in reducing the number of ar- 
ticles carried; Advantages of full stocks; Increasing sales; 
Lower prices; Typical rates of turnover; Turnover in- 
creases profit, 

23. STOCKKEEPING 388 

Objects; Model stock; Finding the model stock; Stock- 
keepipg systems; Annual inventory with inspection and 
want list; Tickler system; Unit control, or perpetual 
inventory; Advantages of unit control; Disadvantages of 
unit control; Unit control used by a chain of stores; Dol- 
lar control; Advantages of dollar control; Disadvantages 
of dollar control; Short-cut methods, 



Contents xv 

CHAPTER PACK 

24. STOCK ARRANGEMENT AND DISPLAY 401 

Objects; Arrangement; Location and rent; Appearance; 
Drawing customers deep into the store; Customers' con- 
venience; Facilitating sales; Promoting sales of new goods; 
Privacy; Store services; Display; Fixtures; Tables; Wall 
fixtures; Display cabinets; Customer frontage; Window 
display; Types of windows; Building the display; Store 
lighting; Window lighting; Interior lighting. 

25. BUYING 420 

Success in buying; Present demand; Future demand; Or- 
dering and buying; Fashions; Weather; Weather cycles; 
Business conditions; The budget; Quality; Prevailing 
prices; Future prices; The work of the purchasing agent; 
Reciprocity. 

26. PROFITS 433 

Meaning; Proper basis of profit; Variation in profits; 
Object of business not profit; Average profits; Business 
success and failure; Business mortality or turnover: Illi- 
nois study, Other studies; Whv merchants quit business; 
Why merchants fail; Remedies; Examinations. 

27. PRINCIPLES OF SALESMANSHIP 447 

Salesmanship defined; Steps in a sale; Salesmanship vs. 
order-taking; Necessity for salesmanship; Types of sales- 
men; Buying motives; The sale analyzed, The preap- 
proach; Securing interviews; The approach; The hobby 
approach; Securing undivided attention. 

28. THE SALES TALK .458 

Securing interest; Arousing desire; Meeting objections; 
Action; Close on a minor point; The signed order; The 
departure; Types of buyers; Constructing the sales talk; 
Value of sales talks. 

29. RETAIL SALESMANSHIP 469 

Problems in retail selling; The preapproach; The ap- 
proach; The size-up; The interview; Selling to two people; 
Substitution; Creating desire; The close; Suggestive sell- 
ing; Telephone selling; Opportunity for real salesman- 
ship. 



xvi Contents 



30. SUCCESS IN SELLING 481 

Qualifications for success Knowledge; Securing informa- 
tion ; The retail salesman ; Time for study ; Can a salesman 
know too much about his product? Personality; Appear- 
ance; Facial expression; Voice; Manners; Conversation 
Health; Honesty; Industry; Perse\ erance ; Confidence 
Enthusiasm; Smcentv; Initiative; Tact; Other traits 
All traits not necessary. 

31. SALES MANAGEMENT 496 

The sales department ; Hiring salesmen : Type of men 
needed, Sources of men, Securing applications, Selecting 
men; Training salesmen; Supervising salesmen; Stimulat- 
ing salesmen; Paying salesmen. Straight salary, Straight 
commission, Salary and commission, Bonuses; Organiza- 
tion; Territories. 

32. ADVERTISING PRINCIPLES AND POLICIES .... 512 

Three methods of stimulating sales; Why advertise? 
Limitations; What advertising does; Cost of advertising; 
Is advertising worth its cost? The advertising policy; 
Deciding whether or not to advertise ; Method of distri- 
bution; Product; Territory; Financial strength; What to 
advertise; How much to spend; Sales; The task to be 
done ; When to advertise ; Advertising and the business 
cycle; Where to Advertise; Selecting the proper method; 
The advertising agency; Planning. 

33. ADVERTISING OBJECTIVES. MEDIUMS, AND APPEALS . 526 

Kinds of advertising; Purpose; Methods of increasing 
sales; Mediums; Newspapers; General magazines; Special- 
ized periodicals ; Direct mail ; Outdoor advertising ; Radio ; 
Novelties; Dealer helps; Packages and delivery vehicles; 
Car cards; Publicity; Selection of proper mediums; The 
neighborhood store; The village store; The appeal; Buy- 
ing motives; Positive appeal; Fear; Buying motives illus- 
trated. 

34. PREPARING ADVERTISEMENTS 541 

Attention; Size; Shape; Position; The layout; Illustra- 
tion; Securing illustrations; The headline; Color; Copy; 
Writing copy; A few examples. 



Contents xvii 



35. BUSINESS ETHICS 560 

Business ethics defined; Improvement in ethical standards; 
Need for rules and umpires; Agencies; Codes of ethics; 
Better Business Bureaus; Statutes against false advertising; 
Advertisers in the lead; Federal Trade Commission; Trade 
practice conferences; Unfair competition; Practices de- 
clared unfair; Deception of buyers; Commercial bribery; 
Bonuses to buyer's salesmen; Prices; Boycotts; Exclusive 
contracts; Unfair competition under the Nil A; Conclu- 
sions. 



CHAPTER 1 
Meaning and Cost of Distribution 

Interest in marketing. Distribution, or marketing, is 
now the most important part of business. Most business 
concerns can produce many more goo'ds than they can 
sell at a profit. "Give us sales!" is the common cry of 
business men, and huge sums are spent on advertising 
and salesmanship. "Whatever can be sold can be made." 
"There is no longer a problem of production. The big 
problem today is distribution." Such statements are 
common and may be accepted as generally true, although 
there are exceptions. 

This condition has not always existed. Up until com- 
paratively recent times, the big task of the race was to 
produce enough goods food, clothing, and shelter to 
satisfy its needs. This problem has been altered during 
the past 150 years by the use of labor-saving machinery; 
by the discoveries and inventions of chemistry, agricul- 
ture, physics, and engineering; and by the development 
of scientific management and accounting. 

The development of the natural sciences and the arts 
of physics, entomology, geology, chemistry, management, 
and engineering has given us much new knowledge. This 
knowledge has enabled us to increase greatly the output 
of goods and to reduce the costs of production. The re- 
sult is that we are now able to produce many more goods 
than the consumers are able to buy at the prevailing 
prices. Hence business men and farmers have become 
greatly interested in distribution. They wish to find 



2 Meaning and Cost of Distribution 

buyers for their products and to increase the consump- 
tion of their goods. 

Distribution a part of business. Business is divided 
into two parts production and distribution. Produc- 
tion, in its business meaning, has to do with the creation 
of goods. Distribution, or marketing, has to do with 
moving these goods from producers factories, mines, 
and farms into the hands of the consumers. 

Distribution includes buying, selling, advertising, 
transportation, and warehousing. The corner grocer, the 
drug store, the chain store, the department store, the 
mail-order house, the wholesaler, the railroad, the grain 
elevator, the milkman, the livestock shipper, and the 
public warehouse are engaged in distribution. 

Market distribution a part of economics. Economics 
has to do with the way we make a living and the way we 
live. For the purpose of this study, economics is divided 
into production, distribution, and consumption. Pro- 
duction, in the economic meaning, consists in the creation 
of utilities things which satisfy human wants. 

The chief utilities are form, place, time, and posses- 
sion. Form utilities comprise goods and services. 
Bacon, washing machines, radios, airplanes, hats, dental 
service, and pictures are examples of form utilities. 
Place utilities are created when these goods are taken 
from the place of production to the place where they are 
to be consumed. Time utilities are created when these 
goods are kept until they are wanted. Possession utili- 
ties are created by getting goods into the hands of people 
wanting them. The creation of place, time, and posses- 
sion utilities, in the economic meaning, is a part of pro- 
duction. If one is to have clothes, it is just as necessary 
that the cotton be stored until needed, brought to the 



Meaning and Cost of Distribution 3 

places where the consumers live, and got into their pos- 
session, as it is that the cotton be grown and the cloth be 
woven. 

Market distribution includes those activities which 
create place, time, and possession utilities. To the 
economist, market distribution is therefore part of pro- 
duction, as it deals with the creation of utilities. The 
business man, however, thinks of distribution as selling 
his goods and getting them into the hands of the con- 
sumer. To (he economist, marketing is a part of produc- 
tion, and "distribution" refers to the distribution of 
wealth among the members of society. To the business 
man, "distribution" means marketing selling and trans- 
portation. 

This difference of definition is confusing to the stu- 
dent. In order to use his terms correctly, it is necessary 
for him to remember whether he is talking to an econo- 
mist or a business man. In this volume, the business 
man's definition will be followed. Production will be 
used to mean the creation of form utilities or the making 
of goods. Distribution will refer to the creation of place, 
time, and possession utilities or to the transportation 
and sale of goods and services getting the goods from 
the farms and factories to the ultimate consumers. 

Object of distribution. The object of market distri- 
bution, as well as of production (farming and manufac- 
turing), is to supply human wants food, clothing, and 
shelter. In addition to these primary wants, we have 
many other secondary ones. Our wants are expanding; 
the number of secondary wants seems almost unlimited. 
Ws have many more physical goods and personal services 
than our grandparents had; and most of us desire many; 
more than we have. 



4 Meaning and Cost of Distribution 

The larger the quantity of goods and services that 
people want, the greater the volume of business that 
is possible. As our wants are practically unlimited, 
business is capable of almost indefinite expansion. Dis- 
tribution operates to satisfy the wants of people to get 
the goods to them and it often strives to increase the 
number of things which people want to buy. 

Methods of studying distribution. Market distribu- 
tion deals with services, goods, and men. In order to 
market goods, services must be rendered, acts performed, 
things done. These services or acts are commonly called 
functions. 

One method of studying distribution is to take up a 
study of the functions involved. This is called the 
functional approach, or method. 

Another way to study distribution is to study the 
various goods, or commodities, that are marketed and to 
describe the ways in which they reach the consumers. 
This is known as the commodity approach, or 
method. 

The third method of studying distribution is to study 
the operations of men engaged in distribution. These are 
called middlemen or institutions. This method is known 
as the middleman, or the institutional, approach. 

In using the functional approach, we see what services 
or functions are performed; what goods they are per- 
formed upon; and what middlemen perform them. In 
using the commodity approach, we see what goods are 
marketed; what functions are performed upon them in 
the distributing process; and what middlemen perform 
these functions. In using the institutional approach^ we 
see what institutions, or middlemen, are engaged in dis- 
tribution ; what functions they perform ; and what goods 
they handle. 



Meaning and Cost of Distribution 5 

Advantages of functional approach. The study of 
marketing functions draws our attention to the opera- 
tions or services performed in distribution. A study of 
these services helps us to analyze the distribution proc- 
ess; to see just what is done; how it is done; why it is 
done ; and who does it. 

The same function may be performed once or several 
times. Perhaps a study will point out ways of reducing 
the number of times a thing is done. For example, a 
goods may be graded every time it is sold. The adoption 
of uniform standards and the grading by government- 
licensed inspectors may mean that one grading is suf- 
ficient for the entire marketing process. All buyers and 
sellers may buy and sell on the grade established by the 
government inspectors. 

It is often said that there are too many middlemen. If 
a middleman is eliminated, are his functions eliminated 
or are they transferred to others? A study of functions 
should help us to answer such questions. 

Advantages of commodity approach. The commod- 
ity approach starts with familiar goods. It is a simple 
and easily followed method. The disadvantages of this 
method are that it involves long descriptions of goods 
and operations and involves much repetition, if all com- 
modities are studied. 

Advantages of middleman approach. The institu- 
tional approach considers the operations of various 
middlemen. It is a very practical approach, especially 
for the student who later enters business. The danger 
of the institutional approach is that it may become too 
descriptive. It is not as analytical as the functional 
approach. 

We shall devote considerable attention to the opera- 
tions of middlemen, but before doing so, we need an un- 



6 Meaning and Cost of Distribution 

derstanding of the various marketing functions. The 
commodity approach seems best adapted to the study 
of farm products and industrial goods. 

Cost of Distribution 

Cost of production and distribution. Market distri- 
bution costs more than production. This means that 
more than half of the money spent by the consumers 
goes to cover the cost of marketing goods, and less than 
half to cover the cost of producing the goods. This 
statement is based on a large number of studies. It 
represents average conditions. In some cases the pro- 
ducer receives all of the consumer's dollar, as when a 
farmer peddles his eggs from house to house. In others 
distribution takes all the consumer's dollar, as when a 
farmer ships goods to market which sell for only enough 
to cover the transportation costs and commission. 

Illustrations: (a) Oranges. A dollar spent by the 
consumer for California oranges is divided as follows: 

Grower for fruit on tree * 27.2^ 

Picking and hauling to shipping point 2.9 

Packing 10 3 

Selling and advertising 2.5 

Transportation and refrigeration 23.1 

Jobber's margin 5.5 

Retailer's margin 28.5 

Consumer pays 100.0^ 

*Figures are from Annual Report of California Fruit 
Growers Exchange and cover the year 1934-35. 

The grower receives 27 per cent of the price paid by 
the consumers for the fruit on the trees. Picking takes 
something like 2 per cent, while marketing takes 71 per 
cent. 

(b) Cornflakes. A dollar spent by the consumer 
for cornflakes is divided as follows: 



Meaning and Cost of Distribution 



Farmer 

Transportation 15.6 

Manufacturing 11.3 

Selling expenses 36.8 

Profits 14.2 

Consumer pays 100.0^ 

If we divide the profits arbitrarily between production 
and distribution, on the basis of expenses incurred in 
each, we see that production took 39 cents and market- 
ing took 61 cents. 

(c) Bread. A dollar spent for bread at a retail 
grocery store is divided as follows, according to govern- 
ment figures: 

Farmer, to cover cost of producing and marketing wheat 13.4^ 

Country elevator's margin 0.8 

Transportation to and marketing wheat in terminal market. 3.2 

Flour mill's margin 4.8 

Transportation of flour 3.1 

Wholesale baker: 

Cost of manufacturing bread 19.9^ 

Other ingredients (n addition to flour) 10.8 

Selling expense 18 6 

General and administrative expenses 2.9 

Profit 76 

Total to wholesale baker 59.8 

Retail grocer's margin 14.9 

Price to the consumer 



The production and marketing cost of the farmer is 
13.4 cents, the flour mill's margin is 4.8 cents, and the 
baker's manufacturing cost is 19.9 cents: a total of 38.1 
cents to cover production costs and the marketing costs 
of the farmer and flour miller. Transportation of wheat 
and flour and the marketing of wheat cost 7.1 cents, the 
baker's selling expense is 18.6 cents, and the grocer's 
margin is 14.9 cents. Here, therefore, 40.6 cents go for 
distribution. The remainder of the dollar, 21.3 cents, 
goes for other ingredients and to cover the baker's profit 



8 Meaning and Cost of Distribution 

and general expense. Dividing this sum (21.3 cents ] 
arbitrarily, half to production and half to distribution 
we reach the conclusion that distribution costs are 51.J 
cents and production costs are 48.7 cents. In the lattei 
figure, however, are included the marketing costs of th( 
farmer and the flour miller, which are not shown sepa- 
rately in the above table. 

(d) Shoes. A dollar spent for shoes was dividec 
as follows by a government commission : 

Raw materials 41.1^ 

Manufacturing costs 17.2 

Manufacturer's general and selling expense. 105 

Manufacturer's profit 2.7 

Retailer's expense 25.4 

Retailer's profit 3.1 

The consumer pays 100 .0^ 

Out of $10 spent for shoes, $4.11 goes for raw materi- 
als; $1.72 for manufacturing cost; and $2.85 to the re- 
tailer. These figures on their face indicate thai 
production takes more than half of ihe consumer's dollar 
Raw materials and manufacturing costs, plus two-third: 
of the manufacturer's general and selling expenses anc 
profit, amount to $6.71, or two-thirds of the price paic 
by the consumer for shoes. 

Let us, however, look at these figures a little mor< 
closely. Forty-one cents out of each dollar was spent b] 
the manufacturer for leather and other raw materials 
Now, the cost of these materials was made up in no smal 
part of distribution costs. Leather comes from hidei 
and skins, and these come from animals raised in variou: 
parts of the world. There is, first, the cost of marketing 
the live animals, and next, the cost of getting the skin 
to a tanner. The tanner sells the leather; then th( 
leather must be transported to the shoe factory. It thui 
appears that a very considerable portion of the cost o 



Meaning and Cost of Distribution 9 

raw materials goes for distribution. If one-half of this 
cost be assumed to represent distribution, then about 47 
per cent of the price paid by consumers for shoes goes 
for production and about 53 per cent for distribution. 

Total cost of marketing. The author has estimated 
that of the total amount of money expended by the Amer- 
ican consumer for goods, 52 per cent goes to cover mar- 
keting costs and 48 per cent to cover production costs. 1 
These percentages probably do not apply to the mar- 
keting of services, recreation, and travel (such as medi- 
cal services, theaters, railroads, public utilities). Such 
services appear to be sold relatively more cheaply than 
goods, as fewer middlemen are involved and the producer 
often comes into direct contact with the consumer. 

Why are marketing costs so high? According to 
Census figures, more people are engaged in production 
than in marketing. Production also appears to employ 
more capital, owing to the relatively heavy investments 
in factories, machinery, farms, mines, forests, and oil 
wells. Yet distribution costs more than production. 
This fact is apparently explained by the relatively high 
earnings of people in some marketing work (for example, 
operating railroads and wholesale houses) and the rela- 
tively low earnings of farmers. In considering the low 
average income of the farmers, it should be remembered 
that they raise most of their food, a considerable portion 
of their fuel, have no house rent to pay, and do not have 
to pay carfare to and from work and buy lunches as do 
many city workers. Nevertheless, their average money 
income is low and pulls down the average for the produc- 
tion group. 

One reason for the high costs is that the study of mar- 

1 Converse, Paul D.: Elements of Marketing, rev. ed., New York, 
Prentice-Hall, Inc., 1935, Appendix. 



10 Meaning and Cost of Distribution 

keting is relatively new, while chemistry, physics, agri- 
culture, engineering, and mining have been studied for 
decades. The first textbook on market distribution 
appeared scarcely 20 years ago, and only since 1915 has 
serious market research been undertaken. The govern- 
ment has for many years taken censuses of agriculture, 
manufacturing, and mining; but the first Census of Dis- 
tribution was taken in 1930. 

Second, power-driven machinery has been applied to 
manufacturing and farming. Distribution, with the ex- 
ception of transportation, remains largely a hand 
industry. It employs relatively few mechanical aids. 

Third, there are many wastes and risks in distribution 
poor packing of goods for shipment, poorly designed 
and inadequate facilities for handling goods in many 
cities, and lack of standardization. There is much dupli- 
cation of effort : many salesmen call upon the same buy- 
ers; competing delivery wagons cover the same streets; 
small competing stores stand side by side; much adver- 
tising is wasted. 

Fourth, there are many risks. Goods spoil and go out 
of fashion; prices may fall while goods are in stock; 
goods may be stolen or destroyed by fire. 

Transportation as an element in marketing cost. 
Large-scale production means that large factories are lo- 
cated in regions that are especially adapted to the pro- 
duction of given products. Therefore goods must be 
transported long distances to the consumers. The con- 
sumers today want a great variety of goods, many of 
which are brought from distant parts of the world. 

Service as an element in cost. A part of the high cost 
of distribution is often blamed on the services furnished 
the consumers. It is said that the consumers want a 
great variety of goods upon an instant's notice; that 



Meaning and Cost of Distribution 11 

they buy in very small quantities; that they want much 
credit; that after making purchases they frequently 
change their minds and return goods to the stores; that 
they want instruction in the use of goods; that they 
want the goods repaired free of charge; that they want 
goods delivered; that they want to trade in stores with 
expensive fixtures; and that they expect to be waited 
on the instant they enter a store. 

Such services increase the cost of marketing and prices. 
Some assume that the higher prices injure the consumer. 
Services may or may not be worth their cost to the 
consumer. To illustrate : Mrs. Jones may prefer to visit 
the grocery store, pay cash for her groceries, and carry 
them home. On the other hand, Mrs. Smith may be a 
very busy woman. She may have heavy home duties and 
may prefer to spend her leisure in reading, working her 
garden, or playing golf. She wants to order her groceries 
over the telephone and have them delivered. Now, in 
the town where the Joneses and Smiths live it may cost 
10 cents to deliver an order of groceries and 5 cents to 
enter the charge on the books. Delivery and credit serv- 
ice are worth 15 cents to Mrs. Smith, because she values 
her time more for other purposes. The services are a 
utility to her. She is not injured by the grocer's charge 
for them. Mrs. Jones, on the other hand, does not want 
these services and is injured if she has to pay for them. 

Have marketing costs increased? It has been stated 
that during the past century production costs have de- 
creased while distribution costs have increased, and that 
distribution now takes a larger percentage of the con- 
sumer's dollar than formerly. Even if true, this does 
not prove that distribution costs have increased abso- 
lutely, even if they are measured in terms of money with 
a stable purchasing power. The increase may have been 



12 Meaning and Cost of Distribution 

entirely relative. To illustrate, at a former time it may 
have cost 40 cents to produce an article and 20 cents to 
market it. The price to the consumer was 60 cents. At 
the present time, owing to improvements in methods of 
production, the cost of producing this article may have 
fallen to 20 cents, while the distribution costs have re- 
mained stationary. The price to the consumer is 40 
cents. 

Past Period Present Period 

Production costs 40^ 20^ 

Distribution costs 20 20 

Price to consumer 60^ 40^ 

In the past period production took two-thirds and dis- 
tribution one-third of the price to the consumer. At the 
present time distribution takes one-half of the consumer 
price. The consumer is benefited, for she receives the 
article 20 cents cheaper than she did in the past. 

Distribution costs may actually decrease and yet take 
a relatively larger portion of the consumer's dollar. 

Past Period Present Period 

Production costs 40^ 20^ 

Distribution costs 20 15 

Price to the consumer 60^ 35^ 

In this case, marketing costs have decreased 5 cents, 
and yet in the past period marketing took 33% per cent 
of the consumer's dollar, while at present it takes 43 per 
cent. 

Marketing costs may increase while the price to the 
consumer decreases. 

Past Period Present Period 

Production costs 40tf 20tf 

Distribution costs 20 30 

Price to consumer 60^ 50^ 



Meaning and Cost of Distribution 13 

Although marketing costs increased 10 cents, the con- 
sumer is not injured, as he receives the articles for 10 
cents less than he did in the past period. The consumer 
would be injured, however, if distribution costs increased 
more than the production costs decreased. 

Marketing costs should be reduced. The people en- 
gaged in marketing should not be satisfied with their 
record. Distribution costs as well as production costs 
should be reduced. A leading merchant says that he will 
consider his business life a failure if he does not succeed 
in bringing down the cost of retailing. Men engaged in 
distribution should not be satisfied to see all the laurels 
go to the production men. The man who reduces the 
cost of distribution does just as much to increase the 
standard of living and the well-being of the people as 
does the inventor of a machine which reduces the cost of 
production. 

In order to reduce costs, marketing should be studied. 
Market research is needed. Improved methods will come 
from study and research. 

Chapter 1 
Review Questions 

1. Which is more important today, production or market- 
ing? Why? Which costs more? 

2. Why has our capacity to produce goods increased 
faster than our capacity to market them? 

3. Define economics. 

4. Define distribution (or marketing). 

5. What is the relation of distribution to business? To 
economics? 

6. What is meant by utility? What utilities are crea- 
ted in the process of distribution? 



14 Meaning and Cost of Distribution 

7. What arc the two meanings of distribution? 

8. What are the two meanings of production? 

9. What is the object of marketing? 

10. What are the three ways of studying market distri- 
bution? What is the chief advantage and disadvantage of 
each method? 

11. Enumerate the costs included in the price of a loaf of 
bread; of a pair of shoes. 

12. Why are distribution costs so high? 

13. Are the consumers benefited or injured by the liberal 
services offered today by the sellers? 

14. "Large-scale production increases transportation costs." 
Comment on this statement. 

15. Why are marketing costs said to have increased dur- 
ing the past century? 

Thought Problems 

1. What do people want? Do most people have all the 
things they want? How does market distribution operate to 
supply human wants? 

2. Does the getting of the things we want make us happy? 

3. How can people be made to want more things? Name 
all" the ways you can think of and indicate those which you 
consider are the most important. 

4. Should people be made to want more things? 

5. The offering of so many services by sellers is given 
as one reason for the high cost of distribution. Some people 
assume that these services are rendered by the sellers in the 
competitive struggle for business and that the consumers 
are injured by the high cost of rendering these services. Do 
you agree? Why or why not? 



CHAPTER 2 

What Marketing Involves Marketing 
Functions 

Functions or services involved in distribution. If 

goods are to be distributed, services must be performed. 
Work must be done to get goods to the consumers. The 
acts, services, or operations performed in getting goods 
from the producers to the consumers are called functions. 
The marketing functions. The two main groups of 
functions in distribution are: (1) the change in owner- 
ship (title) and (2) the physical handling of goods. The 
first creates possession utility, and the latter, place and 
time utilities. The marketing functions are classified 
below. Certain general business functions which are in- 
volved in marketing are included : 

A. Change of ownership: 

1. Buying; 

2. Selling. 

B. Physical handling of goods: 

3. Transporting; 

4. Storing; 

5. Packing; 

6. Standardizing and grading; 

7. Assembling; 

8. Dividing. 

C. General business functions involved in marketing: 

9. Financing; 

10. Risking; 

11. Recording; 

12. Managing. 

15 



16 Marketing Functions 

Buying 

Goods must be bought or produced before they can be 
sold. When they are produced, raw materials, operating 
supplies, and machinery must be bought. We thus think 
of marketing as beginning with buying. Buying is im- 
portant both to business men and to consumers. 

The present-day consumer buys a great variety of 
goods meats, vegetables, cereals, butter, cheese, and 
other foods ; cloth, shoes, hats, and ready-made garments 
for clothing; furniture and house furnishings; medicines 
and toilet articles; automobiles, tires, and gasoline; and 
amusements. 

Most consumers do not have enough money to buy 
everything they desire, and must choose those things 
which are best adapted to their needs and pocketbooks. 
The consumer has been accused of using poor judgment 
in buying. With the great variety of goods to be bought, 
it is next to impossible for one person to be a good judge 
of the qualities and merits of all the goods purchased. 

Buying function analyzed. The buying function may 
be divided as follows: 

(a) Determining needs; 

(b) Finding sources of supply sellers; 

(c) Negotiating prices and other terms; 

(d) Obtaining title to the goods (legal part of buying). 

Determining needs. The manufacturer, the mer- 
chant, and the consumer must determine their needs. 
Their problems are somewhat different. The business 
concern buys with the needs of the customer in mind, 
while the consumer buys to satisfy his own wants. 

The business concern should study its past sales records 
to determine trends in demand. From these records it 
can determine the types of goods and prices suited to its 



Marketing Functions 17 

customers. It should study trends in fashion. The 
large business concern often has a laboratory where pro- 
ducts are tested to determine their actual qualities and 
their suitability to the buyers' needs. 

The ultimate consumer must determine how he will 
spend his money. He often weighs the relative advan- 
tages of one purchase against another. It may be a new 
automobile, a year in college for his son, new furniture 
for the home, or a vacation trip for the family. 

Finding sources of supply. Under present conditions, 
the sellers usually seek the buyers, but in spite of this 
practice the buyer often needs to hunt a seller. The 
buyer may want a new or a different product, and no 
salesman offering this product may call. 

Negotiating terms. In retailing, many stores have 
adopted the one-price policy. In such stores the customer 
buys at the specified price or does not buy. He may, 
however, shop from store to store for a lower price. In 
wholesaling, however, there is much room for price nego- 
tiation. Orders may go to the lowest bidders. Many 
sellers may be after the same order. Credit terms, time 
for delivery, payment of freight, repair service, guarantee, 
and other terms may be negotiated. 

Obtaining title. The buyer must obtain legal title 
to the goods before a purchase is completed. The pass- 
ing of title may be taken for granted in ordinary pur- 
chases, but in case of a dispute, the time and place where 
title passes from seller to buyer are important. Where 
large amounts are involved, or where goods are made to 
order, formal contracts are often used. 

Selling 

Selling function analyzed. Most business men say 
that selling is the most important distributing function. 



18 Marketing Functions 

The man who can sell his goods at a profit is successful, 
while the man who cannot sell his product is a business 
failure, no matter how good his product may be. The 
selling function may be divided as follows : 

(a) Creating demand; 

(b) Finding buyers; 

(c) Giving buyers advice; 

(d) Negotiating terms; 

(e) Transfer of title. 

Creating demand. By creating demand we mean 
arousing the desire for things among people who have 
ability to buy them. If people can be made to want 
things badly enough, they may work harder or more in- 
telligently in order to secure the money with which to 
buy them. Some explain the development of civiliza- 
tion by saying that people were made to want things, and, 
in order to satisfy their desires, they worked and 
schemed. As a result of this work came development. 
According to this reasoning, the salesman and the adver- 
tiser who arouse our desires for new or better things help 
to develop civilization. On the other hand, some say that 
we are oversold and are too dissatisfied to get the most 
enjoyment out of life. Lack of space forbids a discussion 
of this idea here. 

New things, better things, more beautiful things are 
constantly being placed on the market. People must be 
made to want these things. The seller may use adver- 
tising, personal salesmanship, or publicity to create de- 
mand. He may display and demonstrate the goods, give 
away samples, and try to "educate" the buyers to the 
advantages of his product. Much advertising and a 
goodly portion of personal salesmanship is used to create 
demand. 



Marketing Functions 19 

Finding buyers. A good deal of the selling effort is 
directed to finding people who already want the product. 
Want ads are almost entirely directed to people who are 
already conscious of a need. Many retail salespeople 
assume that people know what they want when they 
enter a store. Many traveling salesmen are in reality 
"order takers" who simply take orders from people who 
know that they need the goods offered by the salesmen. 
Most price advertising is aimed at people who already 
want the goods. 

Giving advice. The seller often gives advice to buy- 
ers. This advice may relate to the use of the product, 
or it may be much broader and be given to help the buyer 
determine his needs or to conduct his business more effi- 
ciently. Many buyers depend upon the sellers to teach 
them to use and repair their goods. By helping the 
buyer to secure the best use from his products, the seller 
secures satisfied customers and a reputation for his goods 
which helps to increase sales. The seller may go farther 
and help the buyer with the conduct of his business: 
he may give advice on stockkeeping, advertising, window 
display, bookkeeping, buying, or salesmanship. He does 
this to build up goodwill or to make the buyer a better 
business man, so that he will sell more of the seller's 
goods. 

Negotiating terms. The negotiation of terms and the 
transfer of title were discussed above. 

Transporting 

Transportation involves getting goods and services 
from the places where they are produced to the places 
where they are wanted by the consumers. This is what 
in economics we call the creation of place utility. 

Civilization in no small degree has been made possible 



20 Marketing Functions 

by transportation. It permits the exchange of goods be- 
tween sections with different resources, climates, and in- 
dustries. It enables goods to be produced in places that 
are best adapted to their production. Factories can be 
located near raw materials, labor supply, power, or the 
consumers. Foods can be grown in regions that have soil 
and climate adapted to their production. Through the 
production of goods in favorable regions, production costs 
are reduced. 

Transportation enables us to secure a great variety 
of goods. We secure tea, rubber, and silk from the 
Orient; coffee from Brazil; sugar from Cuba; cocoa from 
Africa and South America; iron ore from Minnesota; 
oranges from Florida and California; wool from Aus- 
tralia; canned salmon from Alaska; canned pineapples 
from Hawaii; and so on for hundreds of other products. 
Transportation enables us to have many fresh goods, 
such as fruits and vegetables, the year around. 

Goods moved by owners and agents. Goods may be 
moved by their owners or by hired agents. The farmer 
often hauls his goods to the railroad station, while the 
manufacturer and merchant often deliver goods to 
customers in their trucks. Customarily, however, goods 
are moved by agents such as railroads, express companies, 
trucking companies, and steamship lines. 

Methods of transportation. Goods are moved by rail- 
roads, trucks, barges, ships, airplanes, pipelines, and 
animals and human beings. 

Local transportation appears to cost more than rail 
transportation. The handling of goods between facto- 
ries, stores, warehouses, trucks, and freight cars is one of 
the most expensive parts of transportation. One study 
showed that the cost of packing, carting, loading, un-_ 



Marketing Functions 21 

loading, and unpacking 20 commodities was nine times 
as much as the freight paid to the railroads for moving 
them. 

The motor truck is used in local transportation. It is 
a feeder for the railroads, and is also an important com- 
petitor of the railroads for long-distance traffic. The 
airplane offers great possibilities and is already impor- 
tant in carrying passengers, express, and mail. Pipe lines 
are important in moving oil and gas. In international 
trade, water transportation is necessary. In the United 
States, inland water transportation is relatively unim- 
portant except for the movement of iron ore, coal, grain, 
and other commodities on the Great Lakes. 

In the movement of passengers, the passenger auto- 
mobile, the street car, the motor bus, and the railroad 
are the important agencies. In total mileage the auto- 
mobile comes first. 

Our transportation system. We have 3,000,000 miles 
of rural highway and 250,000 miles of city streets. One- 
third of the rural highway is improved, and 10 per cent 
is included in state highway systems. Most of the city 
streets are surfaced. We have 25,000,000 automobiles 
and trucks; 250,000 miles of railway line; 50,000 loco- 
motives; 2,000,000 freight cars; 50,000 railroad passenger 
cars; and 27,000 miles of navigable rivers and canals, of 
which 5,000 miles have a depth of over six feet. 

The railroads move goods and people, but freight 
transportation is their most important business. Ex- 
cluding purely local truck movements and goods moved 
by their owners, the railroads move about one-half of the 
total freight of the country. The railroads, however, 
move goods for longer distances than trucks and river 
carriers, so that they carry nearly three-fourths of the 



22 Marketing Functions 

traffic load as measured in ton miles. 1 Prior to 1930 they 
carried 1% billion tons of freight yearly. This was more 
than 50,000,000 carloads. Rail traffic declined some 40 
per cent in the early 1930's owing to the business de- 
pression and the competition of motor trucks. At this 
writing, rail traffic is increasing, but some of the railroad 
business seems permanently lost to the trucks. No com- 
plete census has been taken of truck traffic. Intercity 
traffic runs into hundreds of millions of tons, and, count- 
ing all local traffic, the total is much more. 

Vessels on the Great Lakes moved an average of 
125,000,000 tons annually during the decade ending in 
1932. Most of this traffic consisted of iron ore, coal, 
stone, and grain. During the same decade, the rivers 
and canals of the country moved 200,000,000 tons annu- 
ally, most of which was moved for short distances (av- 
eraging about 50 miles). One-fourth of the river 
traffic involves shipments of gravel, sand, and cement, 
most of which is used in construction operations on the 
rivers. 

Figures showing the amount of goods transported in 
1932 are given in Table 1. It should be remembered 
that 1932 was a poor business year, in which the amount 
of traffic was low. The figures for truck movements 
cover only intercity movements of goods carried by 
trucks operated for hire. A very large amount of traffic 
is moved between cities by merchants and manufac- 
turers. The for-hire intercity trucks made up only 6 
per cent of the total number of trucks in operation, in- 
dicating that the majority of trucks are used for local 
hauling and for long-distance movement by the owners 
of goods. 

1 A ton mile is a unit of measurement denoting the movement of 
one ton of goods one mile. 



Marketing Functions 23 

|T ABLE 1. TRAFFIC MOVED BY VARIOUS CARRIERS IN 1932 

Type of Carrier 



Railroads 

Great Lake vessels . . 

Pipe linos (petroleum) 

Intercity trucks 

River and water car- 
riers . . 

Electric railways and 
airplanes 



Totals 



Tons Moved 
(thousands) 


Per Cent 
of Total 


Ton Miles 
(millions) 


Per Cent 
of Total 


678,854 
39,544 
80,029 
299,768 


53.9 
3.1 
6.3 
23.8 


235,309 
24,734 
19,600 
29,977 


73.9 

7.8 
6.2 
9.4 


151,276 


12.0 


7,910 


2.5 


11,661 


0.9 


583 


0.2 



1,261,132 



100.0 318,113 



100.0 



Cost of transportation. The total cost of transporta- 
tion, including the operation of railroads, automobiles, 
trucks, buses, pipe lines, airplanes, and vessels on inland 
waterways, and including the cost of building and main- 
taining our highways and streets, is some 20 billion dollars 
annually, and this figure does not include the total cost 
of loading and unloading goods at stores and warehouses. 
A very considerable part of this cost covers the move- 
ment of people who are traveling for pleasure rather 
than business. The cost of transportation may be said 
to equal approximately one-fourth of our national in- 
come. This indicates that transportation is one of the 
most expensive of the marketing functions. 

Services rendered by railroads. The railroad moves 
freight in carload quantities (c. 1.) and in less-than- 
carloads (1. c. 1.). The rates are lower on the former. 
Carload freight is handled in larger quantities, and the 
shippers usually load the goods into cars at the place of 
shipment and unload the goods from the cars at their 
destination. The railroads place ("spot") the cars on 
sidings convenient to the shippers. The railroad usually 
loads and unloads less-than-carload shipments. In the 



24 Marketing Functions 

past, the rail haul began and ended in the rail terminals. 
If a shipper did not have a siding, he delivered his goods 
to a railroad-owned siding or freight house. The ex- 
press company for many years has picked up packages 
from the shippers 7 doors and delivered them to the door 
of the consignees. This pick-up and delivery service 
is known as "store-door delivery." Motor-truck car- 
riers commonly give this service. In order to meet truck 
competition, many railroads are giving free store-door 
delivery on less-than-carload shipments, and this will 
probably soon be done by all the railroads. The prac- 
tice could also be applied to carload shipments. 

Liability of common carriers. A common carrier is 
one who holds himself out to the public to move goods 
or persons for pay. A common carrier should not be 
confused with a carrier for hire, who moves goods or per- 
sons under special contract and does not hold himself 
out to move goods for anyone who may apply. The 
common carrier must serve all equally at reasonable 
prices. He cannot refuse to serve as long as he has fa- 
cilities available. He is responsible for the safe delivery 
of the goods or persons in his care. He is excused for 
damage to goods or injuries to persons only for such 
causes as acts of God, acts of a public enemy, acts of 
shippers, acts of public authorities, or loss caused by the 
inherent nature of the goods. This heavy responsibility 
upon the common carrier seems reasonable, as the ship- 
per ordinarily cannot tell when, where, or why his goods 
are lost or damaged while they are in the hands of the 
carriers. 

Bills of lading. The contract between the railroad 
and the shipper is called a bill of lading. The bill of 
lading is a receipt for the goods, a contract for the trans- 
portation of the goods, and a shipping order. 



Marketing Functions 25 

There are two kinds of bills of lading. The straight 
bill is used for ordinary shipments. A copy is sent to 
the consigne^who presents it to obtain the goods from 
the carrier. The order bill is used by the shipper when 
he wishes to collect from the buyer before the buyer ob- 
tains the goods. The seller ships the goods to his order, 
draws on the buyer, attaches the draft to the order bill, 
and sends these to the buyer's bank for collection. When 
the buyer pays the draft, the bank delivers the bill of 
lading to him. He takes this to the railroad and obtains 
the goods. The order bill of lading carries title to the 
goods and is negotiable. 

Demurrage. Shippers and receivers are allowed a 
stated amount of time in which to load and unload cars. 
This free time is usually 48 hours from 7 A.M. on the day 
following the spotting (placing) of cars or the notice of 
arrival. If cars are held longer, an extra charge known 
as demurrage is made. 

Reconsignment. Many goods are shipped before they 
are sold and are sold while they are in transit. The ship- 
per then changes the destination of the goods. This 
change is known as diversion. When goods reach their 
destination, they may be reconsigned to another point. 
The through rate from the point of origin to the new 
destination applies when shipment continues in the same 
direction, but an extra charge for the reconsigning priv- 
ilege is added. 

In-transit privileges. Goods are often stopped while 
in transit for manufacturing, storing, feeding, grading, 
pressing, or fabricating. Shippers are often allowed in- 
transit privileges, by which they pay only the through 
rate from the point of original shipment to the destina- 
tion of the processed goods plus a relatively small in- 
transit charge. 



26 



Marketing Functions 



Suggestions for improved service. Although our rail- 
road service is fairly good, there is room for improve- 
ment, especially in speeding up the delivery of freight. 
Delays occur particularly in the terminals in the larger 




('<i'irt<'*u J't-nnxi/trania, Railroad. 

Fig. 1. Unloading steel freight containers from a flat car to 
a truck by means of an overhead crane. These containers are 
loaded at the shipper's plant and are unloaded at the buyer's place of 
business. Some railroads are using containers in an attempt to hold 
more of the l.c.L business in competition with motor trucks. 

cities. Some of the proposals for improving the services 
are: the use of smaller trains, such as units powered by 
Diesel engines, for branch-line service and fast passenger 
trains; electrification of the railroads, especially across 
mountains and in cities where the traffic is heavy; the 
pooling of freight cars, so that they can be used wher- 
ever they are most needed; the operation of all the ter- 



Marketing Functions 27 

minal facilities within a city by one terminal company 
so as to expedite the movement of goods through the 
city and better serve the shippers; improved mechanical 
devices for loading and unloading cars; and the use of 
containers holding several tons, which are moved to and 
from the railroad cars by motor trucks. 

Services performed by motor trucks. The 3,500,000 
motor trucks are a very important part of our transpor- 
tation facilities. They are engaged very largely in local 
service delivering goods to the customers by retail and 
wholesale merchants, hauling goods to and from the rail- 
road terminals, hauling goods from farms to shipping 
stations, and moving goods within cities. 

Trucks, however, arc coming more and more to move 
goods between towns served by the railroads. Even if 
the cost of moving goods by truck is higher than the 
railroad rates, the truck may be used because of other 
economies. It moves goods from store door to store 
door. When less-than-carload shipments are made by 
rail, the goods must ordinarily be loaded on the truck, 
hauled to the freight house, unloaded, loaded into a 
freight car, unloaded at destination, loaded into a truck, 
hauled to the store of the buyer, and unloaded. If a mo- 
tor truck is used, it may load the goods at the shipper's 
door and carry them directly to the warehouse of the 
receiver. Thus one motor haul is substituted for two 
motor hauls plus one rail haul. 

For long distances the railroad appears to have lower 
costs, owing to the fact that a train moves a much larger 
load than does a truck. A freight train with a crew of five 
men may move from 2,000 to 5,000 tons of freight, or 400 
to 1,000 tons per man. A man on a motor truck may 
move anywhere from a few hundred pounds up to 5 or 
10 tons. If the average load per man on a freight train 



28 Marketing Functions 

is 600 tons and the average load per man on a truck is 
3 tons, then one man on a freight train moves 200 times 
as much as one man on a truck. Yet in spite of this, the 
movement of goods by truck has grown tremendously. 

Goods are moved by truck for hundreds of miles, and 
hauls of over 1,000 miles are not unusual. Some of this 
growth in truck transportation is due to quicker deliv- 
eries and flexible movements by trucks; to the conven- 
ience of store-door deliveries; to the avoidance of delays 
and damages in rail terminals; to savings in crating and 
handling costs; to the shortening of trade channels and 
the lessening of other marketing costs; and to cheaper 
labor employed in trucking. The latter two reasons are 
very important. Truckers often buy goods at the place 
of production and sell to buyers at the destination a 
procedure that often saves the expense of handling by 
one or more middlemen. It will be shown in later chap- 
ters that trucking often reduces marketing expenses so 
that total marketing costs can be reduced even though 
higher transportation costs are incurred. The wages of 
truck drivers are much lower than the wages of train- 
men. Under the NRA code, for example, minimum 
wages for truck drivers were set at 30 to 55 cents per 
hour, while trainmen are commonly paid more than dou- 
ble this rate. In periods of business depression, many 
trucks are operated by owners who would otherwise be 
unemployed. Many persons buy or rent trucks (often 
used trucks) and go into the trucking business. They 
may be willing to work very cheaply until business im- 
proves so that they can get better jobs. 

It is doubtful whether the tax systems of many states 
require the truck operators to pay their proportionate 
share of the costs of building and maintaining the high- 



Marketing Functions 29 

ways. If this share is not paid, the trucks are given arx 
artificial advantage over the railroads which must build, 
maintain, and pay taxes on their roads. 

Services of passenger automobiles. There are 22,- 
000,000 passenger automobiles registered in the United 
States. These cars are used for both pleasure and busi- 
ness. The average annual mileage of these cars has been 
estimated at 5,600. If the average number of passengers 
per car be taken as two, then the total annual passenger 
miles 2 are some 250 billions. This figure is twelve times 
the passenger mileage of the railroads. 

The automobile has probably done more to affect our 
methods of living than any other invention since the 
steam locomotive. The automobile furnishes fast trans- 
portation adapted to the needs of the individual. It 
has led to the building of a wonderful system of paved 
highways. It has increased travel, brought formerly iso- 
lated communities into touch with the outside world, 
helped education, and shifted retail trading areas. It 
has increased the mobility of trade. The family with a 
car does not have to trade at the nearest store. It can 
visit local stores, or stores located at a distance or in 
other towns. The automobile has changed our methods 
of living and so affected our demand for goods and serv- 
ices. 

The automobile and truck have also affected business 
methods. Many traveling salesmen use automobiles and 
so call upon retailers more frequently than when they 
traveled by train. The motor truck has increased the 
frequency and speed with which goods are delivered 
from producers to jobbers and retailers. 

2 The passenger mile is a unit of measurement denoting the move- 
ment of one person one mile. 



30 Marketing Functions 

Chapter 2 
Review Questions 

1. What is meant by "marketing functions"? Why should 
they be studied? 

2. Enumerate the various marketing functions. 

3. What is meant by "buying"? What are the subdivi- 
sions of the buying function? 

4. What is meant by "determining needs"? 

5. How do the business concern and the consumer de- 
termine needs? 

6. What is meant by "seeking out sources of supply"? 
When is it necessary for the buyer to seek out the sellers? 

7. What is meant by "negotiating terms"? 

8. What is meant by "obtaining title"? 

9. What is meant by "selling"? What are the different 
divisions of the selling function? 

10. What is meant by "creating demand"? How can de- 
mand be created? 

11. How does the seller find buyers for his wares? 

12. What is meant by "giving advice to the buyers"? Why 
does the seller give such advice? 

13. What is meant by "standardizing"? 

14. What is meant by "uniform standards"? How can 
uniform standards be secured? 

15. What wastes are due to a lack of standardization? 

16. What is transportation? What utility does it create? 

17. What different methods of transportation arc impor- 
tant? What do they cost during a year? 

18. Under what conditions are goods transported by agents? 

19. What is a common carrier? 

20. What is the liability of a common carrier? 



Marketing Functions 31 

21. Distinguish between straight and order bills of lading. 

22. Of what does our transportation system consist? 

23. What is c.l. freight? L.c.l. freight? Why the difference 
in rates? 

24. What is demurrage? 

25. What is diversion? Reconsignment? (What rate is 
charged in each case?) 

26. What is meant by in-transit privileges? (What rate 
is charged?) 

27. What suggestions can you make for improving rail- 
road service? 

28. What services are performed by motor trucks? 

29. What are the advantages and disadvantages of the 
motor truck in comparison with the railroad? 

30. What services are performed by passenger automo- 
biles? 

31. How has the automobile affected the marketing of 
goods? 

Thought Problems 

1. It is said that we have too much salesmanship that we 
are "over-sold." It is said that we need more buymanship, 
meaning that the consumers should devote more time and 
attention to buying. Comment on these statements. 

2. It has been said that the desire for things is the main 
factor in causing people to work, and that only as a result 
of work has civilization been developed. According to this 
viewpoint, the person who makes people want more things 
is a benefactor of mankind. Do you believe that people are 
benefited by being made to want more things? 

3. It was formerly the practice for retail dealers to mark 
their prices in code and for the sellers and buyers to higgle 
over prices. Higgling is still common in many foreign coun- 
tries. 

By the "one-price policy" we mean that the seller places 



32 Marketing Functions 

his price on the goods; that the same price applies to all 
comers; and that he will not sell for less than the marked 
price. What are the advantages and disadvantages of this 
policy? 

4. Why is there more higgling over prices in the whole- 
sale than in the retail trade? 

5. Would the establishment of standards by the govern- 
ment, and the requirement that all sellers label their goods 
with the established standard, reduce economic wastes? 
Would you say that the following are standard products: 
Heinz baked beans? Listerine shaving cream? Gillette 
razors? No. 2 red winter wheat? Sunkist oranges? 

6. We spend much effort and money to reduce transporta- 
tion costs. Then we enact high tariffs to make it more ex- 
pensive to take goods from one country to another. Can 
you explain this inconsistency? 

7. What suggestions can you make for improving railroad 
freight service? 

8. Should motor trucks be taxed enough to cover their 
share of the costs of building and maintaining the highways 
and streets? Are they so taxed in your state? 

9. What is the proper place of the motor truck in our 
transportation system? 

10. What is the proper place of inland water transporta- 
tion in the United States? 

11. Who should pay the cost of improving and maintaining 
our inland waterways (including the cost of building and 
operating necessary locks) ? How should the money be col- 
lected? 

12. What do you think of the future of air transportation? 

13. Should the railroads be allowed to abandon branch 
lines when the operation of such lines involves a loss to the 
railroads? 



CHAPTER 3 
Marketing Functions (Continued) 

Storage 

Storage creates time utility. Storage is the keeping 
of things from the time they are produced until they are 
needed by consumers. Primarily it creates time utility. 
It gives the consumer an even or regular supply of goods 
throughout the year, although many goods are produced 
only at certain seasons. Wheat, corn, cotton, tobacco, 
and apples are harvested during relatively short periods, 
but the public wants these goods from day to day. Stor- 
age is necessary to supply this continuous demand. 

The production of many other goods is irregular. Cows 
give more milk and hens lay more eggs in the spring 
and summer than during the fall and winter, but con- 
sumers want about the same quantity of butter and eggs 
throughout the year. Storage is therefore utilized to 
keep some of such irregularly produced products from 
the period of surplus production to the period of de- 
ficient production. Without storage, prices would be 
so high during the fall and winter that many of us would 
have to go without butter and eggs. On the other hand, 
prices would be so low during spring and summer, owing 
to surplus production, that the markets would be de- 
moralized and the farmers discouraged. 

Influence of storage on prices. Storage tends to 
equalize prices. Let us take butter as an example. The 
heaviest production comes in the spring, and since the 

33 



34 Marketing Functions (Continued) 

price drops at this time, dealers buy butter for storage. 
This demand keeps the price from dropping as low as 
it otherwise would. In the fall and winter, when less 
butter is produced, the storage product is placed on the 
market, and this additional supply keeps the price from 
going as high as it otherwise would. The effect of stor- 
age in stabilizing prices may be illustrated by the prices 
of butter before and after the introduction of cold stor- 
age. The first period selected for study was 1880 to 
1884, before cold storage was available. The second pe- 
riod, 1910 to 1914, was after cold storage facilities were 
well developed. Elgin (Illinois) prices were used for 
both periods. 1 Before cold storage was introduced, the 
average high winter price for 120 per cent above the 
low spring price. After cold storage was in use, the av- 
erage high winter price was only 49 per cent above the 
low spring price. 

Five-Year 
Periods 



1880-1884 
1910-1914 



Average of the 
Low Spring 
Prices 

1J# 


Average of the 
High Winter 
Prices 

42 J# 

36^ 


Percentage of 
Fluctuation 
Between High 
and Low 
Prices 

120% 
49 



Storage supplies seasonal demands. The demand for 
many products is seasonal or irregular. Electric fans are 
purchased largely during summer heat waves. Ice skates 
and sleds are sold in largest numbers during the winter. 
Jewelry and toys are sold in largest quantities just prior 
to Christmas. Fireworks are sold in largest quantities 
for the Fourth of July and Christmas. Bathing suits, 
fishing tackle, electric heaters, gloves, and hunting sup- 
plies are also largely seasonal in their sale. If factories 

1 Hibbard, B. H.: Marketing Agricultural Products, Ch. 8. 



Marketing Functions (Continued) 35 

producing such seasonal goods are to be operated regu- 
larly, part of the goods produced during the dull months 
must be stored to meet a later demand. 

Reserve stocks. Reserve stocks are necessary to guard 
against interruptions in production and transportation. 
Production may be interrupted by fires, strikes, floods, 
drouths, or other causes. Some manufacturers carry 
large reserve stocks outside their factories to care for 
their customers in case production is stopped. 

Transportation may be interrupted by storms, strikes, 
wrecks, or floods. Ice stops water transportation on 
northern waters during the winter. Motor-truck trans- 
portation is often interrupted by snow and ice. Sup- 
plies are often stored near the consumers to care for 
interruptions in transportation. 

Costs of storage. Storage involves cost for space, for 
labor in placing goods in the storage warehouse and tak- 
ing them out, for interest on the capital tied up while 
the goods are in storage, for insurance, and for loss and 
deterioration of the goods. 

Storage involves risk. Goods may shrink in weight, 
rot, be stolen, or be burnt. They may be damaged by 
moisture or vermin, they may go out of style, or the 
price may decline. 

People incur these expenses and risks in the hope of 
making a profit. Profit is expected from an advance in 
the price of the goods while they are in storage. 

Kinds of storage. There are many kinds of goods. 
Some are non-perishable and require no special protec- 
tion. Ores, pig iron, and rough lumber are often stored 
in the open, while relatively non-perishable goods, such 
as grains, cotton, wool, and dressed lumber, need only 
be kept in dry places. Some products are semi-perish- 
able. They can be stored for considerable periods under 



36 Marketing Functions (Continued) 

proper conditions. In this class come such goods as ap- 
ples, butter, and potatoes, which should be kept cool and 
at even temperatures. They are often stored in cold- 
storage warehouses. Some goods are highly perishable 
and can be stored for only short periods. Peaches, straw- 
berries, tomatoes, and fluid milk furnish examples. 

Quick freezing. New and improved methods of stor- 
ing have been introduced which increase the number of 
products that can be stored successfully. Recently quick 
freezing freezing at very low temperatures has 
changed the marketing of many products. It has enabled 
fresh ocean fish to be marketed all over the country. It 
is being applied to fresh fruits and meats and enables 
such products to be stored for many months. 

Improved methods of transportation and production 
lessen need for storage. The transportation companies 
are direct competitors of the storage warehouses. To il- 
lustrate, potatoes are stored for use during the winter 
and spring. Yet potatoes produced in southern terri- 
tories are brought by the railroads and steamships to 
northern markets during the winter, spring, and early 
summer; hence the demand for stored potatoes is less- 
ened during these seasons. 

Improvements in methods of production also lessen 
the need for storage. Earlier- and later-maturing vege- 
tables are developed, while better feeding and care of 
dairy herds increase the production of milk in the fall 
and winter. 

Where should goods be stored? Goods may be stored 
at the point of production, at the point of consumption, 
or at an intermediate point through which they pass 
during the marketing process. In order to keep con- 
sumers supplied at all times, it is often necessary that 
some reserve stocks be carried near the points of con- 



Marketing Functions (Continued) 37 

sumption. In the past, seasonally produced farm prod- 
ucts have commonly been shipped soon after harvest, 
and thus a heavy temporary burden has been placed 
on the railroads. It has been suggested that these goods 
should be stored for longer periods at the points of pro- 
duction in order to equalize the burden of the railroads. 
On the other hand, it has been contended that more coal 
should be shipped in the summer and stored near the 
consumers in order to equalize production and transpor- 
tation. 

Some of the factors to be considered in determining 
the best place to store goods are: 

1. The keeping of necessary reserve stock near the 
consumers. 

2. The equalization of the transportation burden on 
the carriers. 

3. The location of the best physical storage facilities. 
Such facilities can often be more fully utilized if pro- 
vided in large markets. 

4. The place where money can be borrowed to best 
advantage to carry the goods while in storage. 

5. Transportation facilities. Goods are often stored 
in terminals where they can be received and shipped 
easily. Goods may be stored in ports where they have 
to be transshipped from vessel to railroad or from rail- 
road to vessel. 

6. Freight rates. Other things 'being equal, goods 
should be stored where the transportation costs of get- 
ting them to the consumer will be least. 

Freight rates. Freight rates are generally lower on 
carload than on less-than-carload shipments. For this 
reason, goods should ordinarily be shipped the maximum 
distance in carloads. This often means that they are 



38 Marketing Functions (Continued) 

shipped to points near the consumers in carloads. Here 
they are unloaded and stored ready for shipment to the 
retailers by truck or by rail in less-than-carloads. There 
is need for considerable study in determining the proper 
locations for storage houses. Transportation costs should 
be held down, while storage costs should not be excessive. 
The seller with stocks within easy reach of the retailers 
has a strong selling advantage. At the same time, if he 
carries stocks at an unreasonably large number of points, 
storage costs will be high. 

This saving in freight rates by storing at central dis- 
tributing points is illustrated by the shipment of catsup 
from New York to Rockford, Illinois. The retailer in 
Rockford does not need a carload of catsup at one time. 
If he has it shipped from New York in less-than-carloads, 
the freight will be $1.59 per 100 pounds. The catsup, 
however, can be shipped to Chicago in carloads (36,000 
Ibs.) for 56% cents per 100 pounds. The less-than- 
carload rate from Chicago to Rockford is 45 cents. Thus 
the total cost of shipping in this way is $1.01% per 100 
pounds. Here is a saving of 57% cents, while the cost of 
storing in Chicago for one month is* 12.8 cents. 

Who should store goods? In the past, the whole- 
saler was depended on to carry large stocks of goods. At 
present, however, many wholesalers carry relatively 
small stocks in order to reduce the cost and risks of stor- 
age. Manufacturers have often assumed a large part of 
the storage function. Improved transportation service 
during recent years, however, has lessened the need for 
carrying reserve stocks. Many manufacturers carry only 
small stocks, producing goods only as rapidly as they are 
sold or keeping only a little ahead of sales. This scheme 
gives the consumer fresher goods and reduces the costs 
and risk involved in storage. 



Marketing Functions (Continued) 39 

Seasonally produced farm products must be stored 
until needed. The question often arises as to whether 
the farmer should sell his products as soon as they are 
harvested or whether he should store them for sale to- 
ward the end of the season. In some years the prices are 
much higher toward the end of the season than in the 
fall, and profits are made by storing goods. In other 
years the spring prices are lower than in the fall, and 
losses result from storing goods. Several studies indicate 
that, over a period of years, spring prices are about 
enough above fall prices to cover the costs of storage 
interest, rent, handling, shrinkage, and deterioration. 
The inference is that if a farmer is able to study all 
supply and demand factors carefully, he can decide at 
each harvest whether to sell his goods at once or store 
for a rise in prices. If he is not capable of making such 
forecasts, then he might just as well follow the practice 
of selling as soon as the goods are harvested. 

Storage facilities. Storage facilities may be provided 
by producers, middlemen, consumers, or warehousemen 
who store goods for pay. Goods are stored in farmers' 
granaries, manufacturers' storerooms, retailers' stores, 
consumers' pantries, and public warehouses. It is very 
important that adequate storage facilities be available 
at all times: sufficient space in properly located houses, 
proper protection against fire and theft, and proper tem- 
peratures. 

Public warehouses. Public warehouses are operated 
to store goods for the public for pay. There are six types 
of public warehouses: 

1. Merchandise, for the storage of general merchandise. 

2. Household goods. 

3. Cold storage, for the storing of goods that must be 
kept cold. 



40 Marketing Functions (Continued) 

4. Special commodity, for storing particular types of 
goods, as grain, tobacco, or cotton. 

5. Bonded, where goods can be stored under bond. 
This is necessary when the movement of goods is regu- 
lated by the government, as is the case with imported 
goods upon which the duty has not been paid. 

6. Custodian or field. Goods are placed in the hands 
of a public warehouseman but are stored on the pre- 
mises of their owners. This procedure secures the 
advantages of storing in a public warehouse without in- 
curring the expense of moving the goods from the owner's 
premises. 

Services of public warehouses. There are several ad- 
vantages of storing goods in public warehouses. A nego- 
tiable receipt may be obtained and used as collateral 
for loans from banks or finance companies. The goods 
cannot be removed and sold without the warehouse re- 
ceipt, which is held by the creditor as collateral. The 
warehouse receipt is secured by a certain quantity of 
goods. While these are in the hands of the warehouse- 
man, they cannot be levied upon by the creditors of their 
owner. Borrowing on a warehouse receipt reduces the 
amount of capital which is necessary to carry goods, or, 
stated another way, the warehouse receipt enables one 
to carry a larger quantity of goods than he could with 
his own capital. 

By storing in public warehouses, one need pay for 
only the actual amount of space used. The amount of 
space needed often varies widely from one time to an- 
other. If a seller provides his own warehouses, much of 
his space may be idle at certain seasons. 

The better public warehouses are well constructed. 
They are fireproof, equipped with automatic sprinklers, 
and are under guard 24 hours a day. For these reasons, 



Marketing Functions (Continued) 41 

insurance rates on goods in such houses are often con- 
siderably lower than for goods in more poorly constructed 
and guarded private warehouses. The reduction in in- 
surance rates is often a very worthwhile saving. In some 
instances savings as high as 90 per cent are reported in 
insurance rates, as between poor private warehouses and 
good public warehouses. 

The public warehouse is especially adapted to the 
needs of a seller who wishes to carry regional stocks of 
goods and who does not have enough goods at the various 
storage points to justify maintaining his own warehouses 
in charge of his own employees. 

Public warehouses render other services for their pa- 
trons. They will receive goods in carlots and ship them 
out in less-than-carlots. They will pack or crate the 
goods when necessary. They will issue invoices, and 
ship goods on a C. 0. D. basis or draw drafts to accom- 
pany shipments made on order bills of lading. Extra 
charges are made for such services. 

Liability of public warehouses. Public warehousemen 
are liable for goods only in case the goods are destroyed 
or damaged because of their negligence. For this rea- 
son, goods in public warehouses are usually insured. The 
warehousemen must ordinarily return to the owner the 
identical goods placed in storage. An exception is made 
in the case of goods such as grain, which may be mixed 
with other goods of the same grade. In this case the 
warehouse must deliver only the same quantity of the 
same grade of goods. Goods which may be mixed with 
similar goods are known as fungible goods. 

Charges of public warehouses. The public warehouse 
bases its charges on the space occupied by the goods, the 
length of time they are kept in storage, and the cost of 
moving them in and out of the warehouse. Extra charges 



42 Marketing Functions (Continued) 

are made for the labor in making shipments, packing 
goods, making invoices, and so forth. 

In addition to these charges, extra charges are made 
for goods that require unusual care or that must be stored 
under special conditions. These extra charges are known 
as "modifications for cause." Examples are furnished by 
silk, which has a very high value; by mirrors, which are 
very fragile; by beans, which are attractive to vermin; 
by onions and green hides, which are malodorous; and 
by liquids, which are subject to leakage. 

General merchandise warehouses generally make a 
handling charge for moving goods in and out and a 
monthly storage charge for the time the goods are left 
in storage. Cold storage houses make a charge for the 
first month high enough to cover the cost of handling the 
goods. A lower charge is made for each additional month 
the goods are left in storage. 

Typical rates are: 

COMMODITY MERCHANDISE HOUSES 

Handling Charge Monthly Storage 
In and Out Charge 

Canned vegetables, per case (# 2 size) . 2^ 1 J4t 

Flour, per barrel (200 pounds) 17^ W{ 

COLD STORAGE HOUSES 

First Month's Each Additional 

Charge Month's Charge 

Eggs, per case (30 dozen) 10f 5 

Butter, per 100 pounds 25<f 15f* 

Government-licensed warehouses. The Federal Gov- 
ernment licenses warehouses to store certain stable farm 
products such as grain, tobacco, cotton, wool, peanuts, 
broomcorn, and dried fruits. The warehouses are oper- 
ated in accordance with rules established by the Govern- 
ment, and products stored in such houses are graded 



Marketing Functions (Continued) 43 

according to Government standards. The warehouse re- 
ceipt covers a definite quantity of staple goods of known 
grade, so the receipts issued by these warehouses are pre- 
ferred collateral for loans. Banks will loan more on them 
than on ordinary warehouse receipts and may make 
loans at lower rates of interest. It is argued that the 
Government should extend the use of licensed ware- 
houses to staple manufactured goods. 

Packing 

Goods are packed for transportation and storage, so 
that they can be handled and protected from damage or 
loss. They may be wrapped, crated, or placed in bags, 
bottles, barrels, or other containers. Liquids must be 
placed in tight containers. Fragile goods must be packed 
with special care or placed in special containers. 

Standardizing 

Standardizing is the fixing of specifications for quality. 
Standards designate quality and may be based on weight, 
physical structure, chemical content, size, sweetness, 
ripeness, soundness, strength, or moisture content. 
Standards facilitate the exchange of goods. When goods 
are of known quality, they can be bought and sold by 
grade, name, or description. Standards thus save the 
labor of repeated inspections. 

Standard goods have a more definite value than non- 
standard goods and can be handled with less risk. Prices 
are more accurately known. Banks will loan more on 
the security of standard than of non-standard products. 
With standardization there is less room for puffing, boast- 
ing, or bragging by the sellers. Middlemen can handle 
standard goods on narrower margins than they can non- 
standard goods. Buyers can secure better values. 



b4 iviarKeting Jt 1 unctions (L/ontmueaj 

Uniform standards. A standard product should be of 
t known quality no matter where it is produced or 
)ought, For instance, No. 2 yellow corn, No. 3 soft win- 
er wheat, fancy yellow cling canned peaches, and size 2 
jx-std. canned peas should be of a known quality, re- 
;ardless of who the producer is. 2 This fact suggests the 
leed for uniform standards which may be set up by cus- 
om, by trade associations, or by government agencies. 

Wastes caused by lack of standards. Some argue that 
I lack of standards leads to one of the largest wastes in 
listribution, which runs into billions of dollars annu- 
ity. According to this argument, small buyers, es- 
>ecially the consumers, are consistently overcharged 
>ecause of their ignorance of quality. Instances are cited 
if relatively simple products that are sold by advertis- 
ng and "high-pressure" methods to consumers for sev- 
ral times their cost. The list of products includes 
nedicines, insecticides, cleansers, foods, pens, clothing, 
office supplies in fact, practically all types of articles. 

Thymol plus small quantities of boric and benzoic 
acid under the name of Listerine sells for $1 a bottle, 
while $495 worth of Listerine has the antiseptic 
qualities of 1^ worth of corrosive sublimate or 33^ 
worth of carbolic acid. A disinfecting spray made 
of formalin, perfume, and water sold for $62 a barrel. 
When its composition became known it dropped to 47 



2 Some have contended that standards are set up by producers of 
dvertised brands. Campbell's soup is supposed to be the same rc- 
ardless of whether it is bought in New York or China. In one 
ense of the word, standards are established by advertising, as the 
>uyers know what to expect whenever or wherever they buy an ad- 
ertised brand. On the other hand, there is no assurance that Camp- 
Bell's soup is of the same quality as Heinz soup or Hormcl soup. It 
3 doubtful whether products sold under the manufacturers' brands 
without uniform grade designations should be called "standards." 



Marketing Functions (Continued) 45 

cents. University purchasing agents found that they 
were paying from 65^ to $6 a gallon for the same 
quality of alcohol. A pooled order of 5 cars was 
bought at 25^ a gallon. A floor varnish costing $1.70 
a gallon was found as durable as one selling for $6. 
The manufacturer of a moth killer paid % ^ a pi n t 
for his raw materials and sold his product for $1 at 
retail. Chase, Stuart, and Schlink, F. J.: Your 
Money's Worth, 1927. 

Large corporations that purchase in large lots often 
set up their own testing laboratories and buy at much 
lower prices than are charged to buyers not so fortunately 
situated. It is argued that huge sums could be saved if 
definite standards were drawn up and all producers were 
required to label their products with their proper grades. 
It would then be possible for the consumers to determine 
the grade which they wanted and to buy this grade from 
the seller at the lowest price. Competition would be 
placed on a price basis, and large expenditures for ad- 
vertising and salesmanship would be greatly reduced. 

Thus runs the argument, and there appears to be con- 
siderable truth in it. Opportunities for large savings 
are possible, even though all the savings claimed might 
not be realized. All products cannot be standardized. 
Some products are bought for their individuality. Pro- 
ducers make goods of various styles, colors, and flavors, 
and they would be likely to advertise their goods as hav- 
ing better or distinctive qualities. It would take several 
years and considerable expense to educate the great ma- 
jority of the people to buy by grade. 

Standardization should be encouraged, although all 
of the advantages claimed by its advocates may not be 
realized. 



46 Marketing Functions (Continued) 

Grading 

Grading is closely associated with standardizing. The 
two are often considered as two aspects of the same func- 
tion. Standardizing is the setting up of rules or specifi- 
cations. Grading is the application of these rules the 
physical work of inspecting, testing, or sorting goods in 
accordance with the specifications. 

Goods may be graded in two ways. First, they may 
be inspected to determine their quality. The inspector 
may look at the goods, feel of them, taste them, or take 
samples for weighing, measuring, or chemical analysis. 
As a result of the inspection, a definite grade is assigned. 
The wheat may be No. 2; the potatoes, No. 1 ; the cotton, 
strict good middling; the butter, 92 score; or the canned 
goods, fancy. 

Second, grading may involve the sorting or separating 
of the goods according to quality. Apples may be sorted 
so that only apples of one size will be placed in the 
same basket. 

Assembling 

Assembling is the bringing together of similar goods 
to obtain larger quantities for shipment or sale. The 
country elevator brings together wheat in quantities large 
enough so that it can be shipped in carloads. The cot- 
ton merchant brings together enough cotton to be able 
to supply the mills with large lots of uniform quality. 
Assembling is important for goods produced in small 
quantities, such as farm products. 

Dividing 

Dividing is the separating of goods into smaller lots 
for sale; it is the converse of assembling. To illustrate, 



Marketing Functions (Continued) 47 

the wholesaler receives a carload of eggs, and since the 
ordinary retailer cannot use a carload at one time, the 
wholesaler divides the load and sells it to retailers by 
the case. The ordinary consumer does not want a case 
of eggs at one time; hence the retailer divides the case 
and sells the eggs to consumers by the dozen. 

Dividing should not be confused with grading. Goods 
may be separated in grading; but this separation is done 
on the basis of quality. In dividing, goods are sorted 
not according to quality but merely to get them into the 
smaller lots desired by the buyers. 

Financing 

All business concerns, in both marketing and produc- 
tion, must be financed. Capital is needed to carry stocks 
of goods, to extend credit to buyers, and to pay operating 
expenses. Sound financing is very important to the suc- 
cess of a business. The capital needed for carrying stocks 
of goods will be considered later in connection with stock 
turnover. Granting credit wisely and collecting accounts 
closely will limit the amount of capital needed for ex- 
tending credit to customers. Financing is not exclu- 
sively a market function; it is generally studied as a 
separate subject. Hence it will not be treated extensively 
in this volume. 

Risking 

Risk is inherent in all business transactions. Distri- 
bution involves many risks risks from the ownership 
of goods; liabilities for injury; risks from financial trans- 
actions; risks on contracts; risks from death, accident, 
sickness, and resignation of workers; and risks from the 
weather. These risks may be grouped as follows: 



48 Marketing Functions (Continued) 

A. Ownership risks: 

1. Drop in value of goods because of decline in 
price; 

2. Change of fashion, meaning goods must be sold 
at a loss; 

3. Fire goods may be burned, or damaged by 
smoke or water; 

4. Theft goods may be stolen or embezzled; 

5. Storm goods may be damaged by flood, tor- 
nado, lightning, moisture, earthquake, hail; 

6. Decay; 

7. Vermin; 

8. Heat or drouth; 

9. Change in demand goods become unsalable or 
must be carried in stock for long periods because 
of business depression, unemployment, strikes, 
crop failures, local catastrophies 

10. Violence damage by mob. 

B. Financial risks: 

1. Accounts and notes may become uncollectible; 

2. Theft and embezzlement of money; 

3. Bank failures may cause loss or cut off sources 
of credit. 

C. Liabilities for injury: 

1. Trucks or salesmen's cars may injure persons 
or damage property; 

2. Customers may be injured OP premises; 

3. Goods sold may be defective and injure the 
buyers; 

4. Employees may be injured while at work. 

D. Liability on contracts: 

1. Coupons or tickets have to be redeemed; 

2. Cost of fulfilling future contracts may increase 
as a result of an advance in wages or prices of 
materials; 

3. Default of others may involve loss on joint con- 
tracts; 

4. Guarantee of goods may involve loss on replace- 
ment of repairs. 



Marketing Functions (Continued) 49 

E. Liability of loss of key men: 

1. Important managers or skilled workers who have 
had expensive training may die, become sick, be 
injured, or resign. 

F. Weather risks: 

1. Sales may be lost because of bad weather. 

Why risks are assumed. Men are willing to assume 
such risks in the hope of making a profit. The greater 
the risk, the greater must be the anticipated profit, to 
induce men to assume the risks. Risks are also taken un- 
consciously by business men. 

Shifting risk. Many of the risks enumerated above 
may be shifted to insurance companies. The business 
men thus do not have to carry all of these risks them- 
selves. Many insure against fire, tornado, theft, auto- 
mobile accidents, and injuries to employees. Some carry 
insurance against other hazards, such as embezzlement 
by employees, rain, hail, and losses from bad debts. Cer- 
tain risks, like changes in fashion and drops in prices, 3 
cannot be insured. 

When risks can be shifted to insurance companies, the 
cost of the premiums can be included in operating ex- 
penses. Men are then willing to work for smaller profits. 
Insurance companies can often base their rates on av- 
erage losses, and such rates may be less than the antici- 
pated earnings necessary to induce individuals to accept 
the risks. A merchant might be ruined if his store burned 
without insurance. The risk is so great that he feels he 
cannot carry it himself, so he shifts this risk to an in- 
surance company. He feels safer and does not need 



3 In the case of some staple commodities, like wheat, corn, cotton, 
silk, coffee, and rubber, which are bought and sold for future de- 
livery on organized exchanges, the owner can largely shift the risk 
of price declines by future sales. Such transactions are called 
hedging. Hedging is discussed in Chapter 6. 



50 Marketing Functions (Continued) 

such a large profit to induce him to stay in business. 
The margin of cost of marketing is thus reduced. 

The insurance company must charge more than enough 
to cover its risks. It has expenses for selling, overhead, 
and adjustments. Such expenses may equal from 25 
to 100 per cent of the losses paid, and one must there- 
fore pay more for insurance than the cost of the risk in- 
volved. For this reason, most business men prefer to 
carry some risks themselves. Usually they carry the 
risks which they feel are less likely to cause losses, and, 
of course, they must also carry the risks that cannot be 
insured. 

Guarding against risks. The business man can do 
much to reduce the amount of risk. Fire damages are 
lessened by fireproof buildings and automatic sprinklers. 
Risk of theft is reduced by good locks and vigilant watch- 
men. Losses from bad debts may be reduced by a careful 
check on applicants for credit and an aggressive collection 
department. Risk of changes in fashion may be limited by 
careful fashion forecasting and the purchase of fashion 
goods in small quantities. Loss from price declines may 
be lessened by detailed market forecasting and a rapid 
turnover of stock. Injuries to employees may be re- 
duced by safety devices and the education of workers. 

Risk increases marketing costs. Risks account for a 
part of the high cost of marketing. The importance of 
risk may be easily seen when the dealer handles fashion 
merchandise or perishable goods. Such goods may drop 
in value, or become unsalable as a result of changes of 
fashion or decay, which occur very quickly. 

Recording 

Accounting, or recording, is necessary in many trans- 
actions: filling out sales slips, order blanks, stock rec- 



Marketing Functions (Continued) 51 

ords, invoices, bills of lading, and want slips; posting 
customers' ledgers; recording expenses; and analyzing 
expenses. Cost accounting has had a wide development 
during the past 35 years. It began as a part of scien- 
tific management and has contributed much to increased 
business efficiency. It is just now being seriously ap- 
plied to marketing activities. 

The business man is often at a loss to know just how 
full and complete records he should keep. Accounting 
involves expense, but it gives facts upon which the busi- 
ness man can base his operations. The present opinion 
is that most business concerns have devoted too little 
attention to accounting in the past. Records can be 
used to reduce expenses and increase profits. Full rec- 
ords are often needed. On the other hand, time should 
not be spent in keeping records that are not used. 

Management 

All business enterprises must be managed or super- 
vised. Policies must be formulated; plans made; em- 
ployees hired, trained, and supervised. The manager 
of a marketing enterprise must decide what types of 
goods are to be bought, what price policies are to be fol- 
lowed in selling, where the business is to be located, the 
credit policy to be followed, and how competition is to 
be met. Management is necessary in performing the 
various marketing functions in moving goods from pro- 
ducers through the channels of trade to the ultimate con- 
sumers. 

Concentration and Dispersion 

In the marketing process, goods are often brought to- 
gether in large markets. From these markets they are 
taken to consumers. The bringing together of the goods 



52 Marketing Functions (Continued) 

is concentration a process made up of several functions. 
It may include buying, transporting, storing, assembling, 
financing, risking, and other functions. The process of 



OR OTHER. 




CQMMISSIONMEN 


CENTRAL 
MARKET 


WHOLESALERS 



WHOLESALERS 
JOBBERS 

AND 
RETAILERS 



RAILROAOS AND 



CONSUMERS 



Fig. 2. Chart illustrating concentration and dispersion. This 
represents the trade channel for farm products which reach the con- 
sumers without being manufactured. Such products are concentrated 
into central markets from which they are dispersed to the consumers. 

taking goods from these large markets to the consumers 
is dispersion, which may include several functions di- 
viding, selling, transporting, financing, risking, and 
others. 



Marketing Functions (Continued) 53 

Chapter 3 
Review Questions 

1. Of what service is storage? What does it create? 

2. How does storage even up the supply of seasonally 
produced goods? Of seasonally consumed goods? 

3. How does storage give protection against interruptions 
in production? Against interruptions in transportation? 

4. How is quick freezing affecting marketing? 

5. How does storage affect price? Illustrate with the 
price of butter. 

6. How do warehouses and railroads compete? 

7. How does improved production lessen the need for 
storage? 

8. What factors should be considered in determining 
where goods should be stored? 

9. What effect do freight rates have on the selection of 
a place for storing goods? 

10. Should the farmer sell his products at harvest or hold 
for sale toward the end of the season? 

11. What is a public warehouse? 

12. What are the types of public warehouses? 

13. What are the advantages of storing goods in public 
warehouses? 

14. What is the liability of a public warehouseman? 

15. How do public warehouses charge for their services? 

16. What are the advantages of storing goods in a 
Government-licensed warehouse? 

17. What is meant by packing? In what different ways 
are goods packed? 

18. What is grading? How does it differ from standard- 
izing? How are goods graded? 



54 Marketing Functions (Continued) 

19. What is meant by assembling? 

20. What is meant by dividing? Why is dividing neces- 
sary? 

21. What is the difference between dividing and grading? 

22. What is meant by financing? 

23. What is risk? 

24. What risks are involved in marketing? 

25. How can risks be reduced? Shifted? 

26. What is meant by recording? How is it involved in 
marketing? 

27. What is management? What does it involve? 

28. What is meant by concentration? By dispersion? 
What does each involve? 

Thought Problems 

1. Do you believe that improved methods of transporta- 
tion and production will make it unnecessary to store goods 
for long periods? 

2. It has been said that storage reduces the price re- 
ceived by the farmer for his goods by increasing the supply 
of goods on the market. Discuss this statement. 

3. It has been said that storage increases the price to 
consumers by increasing the demand at certain seasons owing 
to the demand for goods to place in storage. Discuss. 

4. As a manufacturer distributing goods nationally, how 
would you go about determining at what points you should 
carry stocks of goods for distribution to retailers? 

5. What advantages would follow the establishment of 
Government-licensed warehouses for manufactured goods? 
It has been said that the Government is unfair in establishing 
such warehouses for farm products and not for manufactured 
products. Do you agree? 

6. Does insurance reduce marketing costs? Would it be 
desirable for the business man to shift all possible risks to 
insurance companies? Why or why not? 



Marketing Functions (Continued) 55 

7. What is meant by cost accounting? What has it done 
for manufacturing during the past years? Do you believe 
that it can make any equally valuable contribution to mar- 
keting? 

8. Large-scale production is said to reduce production 
costs. Large-scale production means the concentration of 
production in a few large plants. These plants are located 
at a distance from many consumers. These large companies 
are said to have high distributing costs as a result of the 
"high-pressure" selling necessary to sell enough goods to 
keep their plants operating at capacity. Goods must be 
transported for long distances. Distribution costs are s#id 
to be increased. Do you agree? Granting for the mo- 
ment that distribution costs are increased, are the consumers 
injured by the increased costs? Why or why not? 



CHAPTER 4 

Middlemen, Trade Channels, and 
Commodities 

The middleman approach. The study of middlemen 
(or market institutions) shows what goods the middle- 
men handle and what services (functions) they perform. 
This approach is a practical method of studying market 
distribution. It shows how these middlemen conduct 
their operations and thus is helpful to men engaged in 
marketing. 

There are many types of middlemen: wholesalers, 
jobbers, brokers, sales agents, commission merchants, 
milk dealers, coal dealers, lumber yards, terminal eleva- 
tors, filling station operators, garages, cotton buyers, to- 
bacco and fruit auctions, grain elevators, live stock 
shippers, farmers' cooperative associations, mail-order 
houses, chain stores, department stores, general stores, 
drug stores, hucksters, neighborhood stores, cigar stands, 
ice cream parlors, restaurants, soda fountains, news 
stands, florist shops, and so on. In order to study middle- 
men, it is desirable that they be grouped or classified in 
some way. 

Kinds of middlemen. Those individuals, partner- 
ships, and corporations engaged in marketing are known 
as middlemen. There are two principal kinds or classes 
of middlemen : First, those who own the goods that is, 
have legal title to them. These middlemen are merchants 
in that they buy and sell goods in an attempt to make a 

56 



Middlemen, Trade Channels, Commodities 57 

profit. In addition to other marketing functions, they 
assume the risks involved in the ownership of goods. 
Second, those who are agents who do not own the goods 
but perform certain marketing functions for pay. These 
are called functional middlemen for the reason that they 
perform marketing functions without assuming the risks 
of ownership. 

Merchants. There are many types of merchants. We 
may group them broadly into three main groups : country 
shippers, wholesalers, and retailers. 

Country shippers. The country shipper is en- 
gaged in buying farm products, assembling them at 
country points, and shipping them to central markets. 
Country grain elevators and warehouses, live stock buy- 
ers, specialized produce dealers, creameries and cream 
stations, and cotton buyers are examples of country 
shippers. These are discussed in Chapters 15-18. 

Wholesalers. Wholesalers are merchants who buy 
goods and sell to other merchants and to manufacturers. 
They operate between country shippers and manufac- 
turers on one side, and retailers and industrial buyers on 
the other side; they do not sell to the final consumers. 
There are many types of wholesalers. Some have ware- 
houses and others handle goods in railroad cars or public 
warehouses. Some wholesalers have organizations of 
traveling salesmen and make deliveries to the buyers; 
others operate on the cash-carry basis. Some whole- 
salers are privately owned and operated for profit; others 
are owned by retailers. Some wholesalers handle full 
lines of goods, and others handle only a few itenjs. Some 
handle industrial equipment and sell to industrial buyers, 
while others handle consumption goods and sell to re- 
tail dealers. The operation of wholesalers is discussed 
in Chapter 7. 



58 Middlemen, Trade Channels, Commodities 

Retailers. The retailer is the middleman who 
sells direct to the household consumer. He is the most 
familiar type of middleman. There are many types of 
retailers: chain stores, department stores, news stands, 
mail-order houses, lunch rooms, restaurants, coal yards, 
soda fountains, neighborhood stores, stores handling 
shopping lines, and stores handling convenience goods. 

Retail stores may be classified in many ways, but for 
our purpose we shall classify them as individual or unit 
stores, department stores, mail-order houses, chain stores, 
wagon retailers, and bulk retailers. 

Functional middlemen. The functional middleman is 
an agent who performs certain definite marketing func- 
tions for pay without owning the goods that is, without 
having title to them. He works for definite pay and does 
not buy and sell for profit. Such middlemen may be 
grouped according to the functions performed. A par- 
tial list follows: 

Buying purchasing agents, brokers, resident buyers. 

Selling brokers, sales agents, commission mer- 
chants, selling houses, manufacturers 7 agents, 
auctioneers, advertising agencies, market counsel- 
lors, and market research agencies. Few of these 
agents perform all divisions of the selling function. 

Transportation railroads, trucking companies, 
steamship companies; electric railways; air trans- 
port companies; package delivery companies. 

Storage public warehousemen ; commission mer- 
chants. 

Grading licensed inspectors, commission merchants, 
testing laboratories, appraisers. 

Dividing commission merchants, public warehouse- 
men. 

.Financing finance, credit, and discount companies; 
banks; sales agents; collection agencies; factors or 
commission merchants. 



Middlemen, Trade Channels, Commodities 59 

Risking insurance companies. 
Recording public accountants, market research 
agencies. 

The operations of common carriers and public ware- 
houses have already been discussed in describing the 
transporting and storing functions. The operations of 
brokers, sales agents, and commission merchants are de- 
scribed in the next chapter. 

Trade channels. Goods ordinarily pass through the 
hands of one or more middlemen between the producer 
and the consumer. The trade channel is made up of the 
middlemen who handle an article on its way to the con- 
sumer. We may include in the trade channel only the 
merchants who have title to the goods, or we may include, 
in addition to these, all those who perform any mar- 
keting function. If the latter course is followed, we 
would include the physical movements of the good:: by 
railroads, truckmen, warehousemen, and others; finan- 
cing of goods by banks and finance companies; assuring 
of risk by insurance companies; storing goods by ware- 
house; and so on for all other marketing functions. This 
would give longer and more complicated channels. We 
are ordinarily more interested in following the ownership 
of the goods rather than their physical movement, and 
we shall therefore think of the trade channel as com- 
posed of only those middlemen who buy and sell, re- 
gardless of whether they are the owners of the goods 
or whether they act as agents for the owners. 

Manufactured goods. We may follow the trade 
channel of an article from the producer of the raw 
material through the various middlemen and manu- 
facturers to the consumer of the final product. This 
often makes very long and complicated trade channels, 
as many products go through several manufacturing 



60 Middlemen, Trade Channels, Commodities 

processes. Often a single raw material makes several 
products, while, in other cases, it takes several raw 
materials to make one finished product. For these 
reasons it is simpler to consider that a trade channel 
extends from the producer of an article to the consumer 
of this article, whether the consumer be the manufac- 
turer or the household consumer of the final product. 
Thus the trade channel for wheat extends from the 
farmer to the flour mill, while the trade channel for 
flour extends from the flour mill to the baker, and the 
channel for bread extends from the baker to the final 
consumer. There is thus one trade channel for wheat, 
another for flour, and a third for bread. 

Trade channels illustrated. The shortest possible 
trade channel is found when the producer of goods sells 
them to the .consumer for example, when a farmer 
sells his goods to the consumer. Goods, however, com- 
monly pass through the hands of one, two, three, four, 
or more middlemen. 

Only one middleman may be included when the 
farmer sells his eggs to the retailer or when the manu- 
facturer sells his shoes to the shoe dealer. Manufac- 
turers often sell to wholesalers who sell to retailers. 
This trade channel involves two middlemen, the whole- 
saler and the retailer. This channel is followed by 
many manufactured products. The manufacturer, 
however, often reaches the wholesaler through a bro- 
ker, which involves three middlemen: broker, whole- 
saler, and retailer. 

Four middlemen are involved in the sale of many 
farm products. These middlemen may be a country 
shipper; a commission man or broker; a wholesaler or 
jobber; and a retailer. Imported goods may pass 
through the hands ,of the importer, broker, wholesaler, 



Middlemen, Trade Channels, Commodities 61 

and retailer, in addition to middlemen in the exporting 
countries. Longer trade channels than these are not 
unusual. Eggs, for example, may be handled by two 
or three middlemen in the country and three or four 
middlemen in the city markets. 

Factors determining the trade channel. Some of 
the factors that determine the channel a product 
follows are: distance between producer and consumer; 
perishability of product; number of products sold by 
the seller; scale of production, that is, whether the 
goods are produced on a small or large scale; scale of 
consumption; financial position and size of seller; and 
the need for special facitities for handling the product. 

The greater the distance between producer and con- 
sumer, the longer the trade channel is likely to be. A 
highly perishable product must be marketed quickly, 
and may hence have a shorter trade channel than a 
non-perishable product. Manufacturers of ice cream 
and bread, for example, usually sell either to the re- 
tailers or to the consumers. The manufacturer of a large 
number of products is likely to carry the product nearer 
to the consumer than is the manufacturer of a single 
product. 

Goods produced on a small scale, like farm products, 
must be assembled. This often increases the length of 
the trade channel. Large or well-financed sellers may 
perform more of the marketing functions and carry the 
goods further along the trade channel than smaller con- 
cerns. 

When goods need special facilities for handling, the 
seller must either provide and operate these facilities 
or sell through middlemen who provide them. Very 
often these facilities are supplied by tJie manufacturer. 
Gasoline must be stored in tanks and delivered to the 



62 Middlemen, Trade Channels, Commodities 

retailers in tank trucks. The oil refiners commonly 
provide these facilities and perform the wholesale 
functions. Fresh meat must be kept in cold storage ware- 
houses; many of these are provided by meat packers, 
who handle the meat until it reaches the retailers. 

Sale in same stage of distribution. Sales are often 
made in the same stage of distribution, that is, between 
similar middlemen who perform the same functions. 
Such sales do not pass the goods on toward the con- 
sumer and are frequently made for speculative pur- 
poses. By this is meant that the buyers attempt to 
make a profit out of a change in price and not by per- 
forming a service. Such speculative sales are ordina- 
rily condemned, although it is argued by some that 
they tend to stabilize prices. 

There are sales in the same stage of distribution that 
do not involve speculation, as when one dealer over- 
buys and another underbuys. To illustrate, we shall 
assume that a wholesaler estimates that during a sea- 
son he will sell 3,000 cases of peaches and buys this 
quantity. His sales are less than expected, and toward 
the end of the season he finds that he is overstocked. 
He notifies a broker who finds another wholesaler who 
needs the peaches and makes the sale. The peaches 
are still in the same stage of distribution, and 
no closer to the consumer than when they were in the 
hands of the first wholesaler. Yet the sale resulted 
from mis judgment and not speculation. If, on the 
other hand, the wholesaler had bought more peaches 
than he expected to sell to his customers because of an 
expected advance in price, he would have been a specu- 
lator on the extra peaches. 

Integration. Integration means the operation of 
successive steps, or stages, in the production or mar- 



Middlemen, Trade Channels, Commodities 63 



keting of goods, by one concern. In regard to market- 
ing, we think of an integrated concern as operating the 
machinery for carrying the goods through two or more 
stages of distribution. 1 Thus the manufacturer who 
sells to the retailers is integrated in that he performs 
the wholesale functions in addition to the manufac- 




Mine 



Furnace 



Mill 



Factory 



Mining 
Cost 


Mlg. 
Cert 


Mfg. 
Cost 


Mlg. 
Cost 


Operating 
Exp. 


Selling 
Exp. 




Mine Furnace Mill Factory Wholesale) 
Houses 



Retailer 



Fig. 3. The advantages of integration. Chart showing how tha 
trade channel is simplified and how successive buying and selling 
expenses are eliminated by integration. Above trade channel 
without integration; below trade channel of a concern integrated 
from the production of raw material to the retailer. 

turing functions. The chain store is integrated in that 
it operates both wholesale warehouses and retail 
stores. Many manufacturers are integrated and op- 
erate both factories and wholesale stores. 

Integrated concerns have two important advan- 
tages: First, they eliminate the cost of buying and selling 
goods between the different parts of the organization. 
Thus in an integrated industrial concern, the mine does 



1 This is called vertical integration. Some call the consolidation of 
similar concerns horizontal integration. Thus if several steel mills 
combine, the consolidated company is said to be horizontally in- 
tegrated. The consolidated concern may make some savings by re- 
ducing the number of salesmen and the amount spent for advertising. 
Such savings, however, are not always realized. These concerns may 
attempt to control prices, for which reason they are often frowned 
upon by consumers and the Government. 



64 Middlemen, Trade Channels, Commodities 

not have to sell to the furnace, the furnace does not 
have to sell to the rolling mill, the rolling mill needs no 
salesmen to sell to the foundry, and so on with succes- 
sive manufacturing stages. Similarly, the chain store 
needs no salesmen to sell to its retail stores, and the retail 
store managers spend little time interviewing salesmen, 
as they requisition most of their goods from their ware- 
houses. 

Second, risk is reduced as markets are more definitely 
assured. This enables operations to be planned with 
greater assurance and the plants to be operated more 
evenly. Mines owned by an integrated concern know 
that they have an- outlet for their products so long as the 
factories operate. The wholesale houses of chain stores 
buy with assurance, knowing that they have a definite 
demand from their retail stores. 

Limitations on integration. In order to secure the full 
advantage of integration, the various parts of a concern 
must be coordinated. Suppose a department store oper- 
ates a blanket factory. There is no cost in selling the 
blankets to the department store. If, however, the store 
is unable to sell all the blankets made by the mill, selling 
expense is incurred in selling the remaining blankets. 
Again, an integrated concern may be poorly managed 
because of the variety of its operations. The hired man- 
ager of the department store's blanket mill may be less 
efficient than the owner of a similar mill whose organiza- 
tion is devoted entirely to the operation of the mill. 

The commodity approach. In order to use the com- 
modity approach, commodities must be classified. If 
we should attempt to study each individual commodity, 
such as coal, tobacco, canned vegetables, leather belting, 
candy, wheat, hay, butter, patent medicines, nails, ice, 
automobiles, radios, carpets, and so on, our study would 



Middlemen, Trade Channels, Commodities 65 

be almost endless. It would involve long descriptions and 
much duplication of material. Many commodities are 
handled by the same middlemen or go through the same 
trade channel and involve similar functions. 

Basis of classification. Goods may be classified in ac- 
cordance with their origin or the way they are produced ; 
the way they are consumed; method of purchase; or 
their physical characteristics. 

As to origin, goods may be classified as farm products, 
mineral products, forest products, fishery products, 
partly manufactured products, and completely manufac- 
tured products/ 

As to method of consumption, goods may be classified 
as raw materials, partly finished materials, industrial 
equipment, and consumers' goods. 

With respect to method of purchase, goods may be 
classified as to the elasticity of demand, the stability of 
demand, the frequency of purchase, and the buying 
habits of the consumers. 

As regards physical characteristics, goods may be 
classified as to bulkiness, concentration of value, perish- 
ability, fragility, size, mechanical complexity, need for 
mechanical service, and durability. A combination of 
these methods seems best adapted to our purpose. 

A classification of commodities. 

I. Farm products: 
a. Grain 
6. Livestock 

c. Dairy products milk, butter, cheese, etc. 

d. Poultry and eggs 

e. Cotton 

/. Fruits and vegetables 
II. Industrial goods: 

a. Equipment (machinery) 

b. Supplies 



66 Middlemen, Trade Channels, Commodities 

c. Raw and partly finished goods (aside from farm 

products) 

d. Fabricated parts 
III. Consumption goods: 

a. Convenience goods 

1. Staple necessities 

2. Impulse goods 

b. Shopping goods 

c. Wagon goods 

d. Bulk goods 

Farm products. Farm products are produced on a 
small scale by large numbers of farmers, and hence must 
be concentrated. That is, large quantities must be 
brought together to supply city markets or as raw ma- 
terials for factories. Most farm products are industrial 
goods as they come from the farm but become consumers' 
goods after manufacture. 

Industrial goods. Industrial goods are goods used 
for further production; they are not, therefore, sold to 
the ultimate consumers. The buyers are factories, 
mines, mills, and offices. Industrial goods include such 
things as raw materials, partly manufactured goods, 
machinery, fuel and lubricating oils used by factories, 
typewriters, and other office equipment. 

Consumers' goods. Consumers' goods are bought by 
the ultimate consumers, ordinarily in very small quan- 
tities from a retailer. 

Convenience goods. Convenience goods are usually 
staple products bought frequently, and of small unit 
value. Convenience goods are so called because the con- 
sumers generally buy them in convenient places without 
spending time in shopping. Examples of convenience 
goods are groceries, drugs, and newspapers. Some con- 
venience goods, such as candy, soda water, and novelties, 
are bought largely on impulse. 



Middlemen, Trade Channels, Commodities 67 

Convenience goods should be handled by stores located 
where they are easily accessible to the buyers. This 
may mean neighborhood locations in the residential 
districts for groceries, on a busy down-town corner for 
tobacco and newspapers, or near the business offices for 
lunchrooms. The person buying convenience goods 
usually knows what he wants before he enters the store. 

Shopping goods. Shopping goods usually have a rela- 
tively large value^and are bought at infrequent intervals. 
The consumers attach so much importance to shopping 
goods that they are willing to devote considerable time 
to their purchase. This often means that the consumers 
visit many stores and compare the goods and prices of 
different sellers. This may be done to secure goods 
adapted to the needs of the buyers, or to secure the best 
prices. Suits, coats, dresses, furniture, rugs, jewelry, 
automobiles, women's shoes, and millinery are examples 
of shopping goods. 

Shopping goods are generally sold by stores located in 
the shopping districts and near other stores handling 
similar goods. The buyers like to shop where there are 
several stores so that they can compare goods and prices. 
Shopping stores need large assortments of goods to en- 
able the buyers to make selections. 

Wagon goods. Some perishable goods are consumed 
regularly by the consumers. Such goods are often sold 
from wagons. Milk, ice, bakery products, fruits, and veg- 
etables are examples. 

Bulk goods. Some goods are too bulky to be handled 
by the ordinary type of retail store. The dealers in 
these commodities are often located on railroad sidings 
so that the goods can be unloaded directly from the cars 
into their yards, buildings, or trucks. Coal, lumber, feed, 
sand, stone, cement, and fuel oil furnish examples. 



68 Middlemen, Trade Channels, Commodities 

Such goods are often sold by telephone or by salesmen 
who visit the buyers. Although classed as consumption 
goods in our outline, bulk goods are sold to both con- 
sumers and industrial buyers. 

Organization of material. We shall consider the oper- 
ation of various types of middlemen in the following 
chapters. More attention will be given to middlemen 
engaged in the distribution of consumer goods than to 
those who handle industrial goods. Hoyvever, many deal- 
ers handle both classes of goods. The student should 
keep the classification of commodities constantly in mind 
while considering the operations of the various middle- 
men. 

Following the chapters on middlemen, we shall discuss 
the distribution of industrial goods and farm products. 
The distribution of these commodities differs in many 
important respects from the marketing of consumers 7 
goods. 

Chapter 4 
Review Questions 

1. What is meant by the middleman approach to the 
study of marketing? 

2. Name different types of merchants. 

3. Define functional middlemen. 

4. What are country shippers? What functions do they 
perform? 

5. Name types of wholesalers and retailers. 

6. Name different types of functional middlemen. 

7. What is meant by a trade channel? 

8. What factors determine the trade channel followed by 
different products? 



Middlemen, Trade Channels, Commodities 69 

9. Should we attempt to make one trade channel include 
the marketing of products all the way from the producer of 
the raw material to the consumer of the finished product? 

10. What is meant by a stage of distribution? 

11. Give illustrations of trade channels involving one, two, 
three, and four middlemen. 

12. Why are goods sold in the same stage of distribution? 

13. What is meant by integration? 

14. What are the advantages of integration? How may 
it reduce marketing costs? 

15. What are the limitations on integration? 

16. Distinguish vertical and horizontal integration. 

17. What is meant by the commodity approach to the study 
of marketing? 

18. In what ways may goods be classified for study? Give 
a classification. 

19. What are the characteristics of farm products? 

20. What are industrial goods? Who are the buyers? 

21. What are consumers' goods? 

22. What are convenience goods? 

23. What types of stores handle convenience goods? 

24. What are shopping goods? 

25. What type of stores handle shopping goods? 

26. What are wagon goods? 

27. What are bulk goods? 

Thought Problems 

1. What are the advantages and disadvantages of the 
commodity approach to the study of marketing? 

2. What are the advantages and disadvantages of the 
middleman or institutional approach to marketing? 



70 Middlemen, Trade Channels, Commodities 

3. What types of goods are the following: locomotives; 
ice; men's work shoes; women's dress shoes; overalls; filing 
cabinets; washing machines; coal bought by a factory; coal 
bought by an individual consumer ; pig iron ; iron ore ; cotton ; 
corn for manufacture into cornstarch; sugar for manufacture 
into candy; silk hosiery; men's suits; women's silk dresses; 
typewriters; cigarettes; milk; butter? 

4. A wholesale dry goods house operates mills producing 
cotton cloth, towels, sheets, sweaters, blankets, cotton and 
rayon hosiery, and house dresses. It normally sells to re- 
tailers the entire output of the plants making towels, sheets, 
hosiery, and house dresses. A considerable portion of the 
outputs of the other plants must, however, be sold to other 
wholesalers, chain stores, and other large buyers. 

(a) Is this concern integrated? Is marketing cost reduced 
by the ownership of the factories? Do you believe that this 
wholesale house can operate these various factories as 
efficiently as they could be operated by independent com- 
panies? 

(6) This wholesale house decides to open a chain of retail 
stores. The chain can be supplied very largely from the 
wholesale house and will help to utilize the outputs of all 
the factories. Will the establishment of this chain of stores 
enable goods to be marketed more cheaply than when the 
wholesaler sold to independent retailers? Will the consumer 
be benefited? 

5. Why are functional middlemen used in the marketing 
of goods? 

6. A wholesaler estimates that he will sell, during the 
following winter, 4,000 cases of eggs. He buys 5,000 cases 
and places them in cold storage. He sells only 3,000 cases to 
his regular trade. He therefore has a broker sell the other 
2,000 cases to another wholesaler. Was this wholesaler a 
speculator? 

7. The National Biscuit Company manufactures a line 
of cookies, crackers, and other bakery products. It main- 
tains a large number of distributing houses from which it 
operates trucks to supply its goods direct to the retail stores. 



Middlemen, Trade Channels, Commodities 71 

What factors cause the National Biscuit Company to use 
this method of distributing its products? 

8. Maryland tomato canners often employ sales agents 
who sell their entire outputs. Why is this sales method 
employed? 

9. The large meat packers commonly operate branch 
houses from which they sell their meats to the retail butchers. 
Why? 



CHAPTEK 5 

Brokers and Other Agents 

The agent. An agent is one who acts for another. 
The owner of goods may sell them himself, may hire a 
salesman to sell them, or may have them sold by au 
agent called a broker. 

The broker. A broker is an agent whose regular busi- 
ness is to negotiate sales or purchase contracts between 
buyers and sellers without having title to the goods. He 
is an independent salesman who specializes in selling or 
buying for others. He is an agent (functional middle- 
man) who performs the selling (or buying) function 
without owning the goods. He does not ordinarily have 
possession of the goods. His task is to make contracts 
between buyers and sellers as to price and other terms 
of sale. He usually operates in only one trade and deals 
in relatively few commodities, which are often raw ma- 
terials or staple consumers' goods. His commission is 
ordinarily earned when the contract is made, whether 
or not the goods are later delivered. The broker is often 
thought of as a free lance agent who sells (or buys) for 
anyone who has goods for sale. 

The sales agent. The sales agent is a broker who usu- 
ally sells the entire output of the producers whom he 
represents and with whom he maintains continuous re- 
lations. He may sell only certain of the lines produced 
by his principals (manufacturers or other producers) 
or may represent them only in a limited territory. A 

72 



Brokers and Other Agents 73 

sales agent is usually much closer to his employers than 
is the broker. He may finance them and may have full 
authority in naming the selling price of their goods. He 
usually receives a higher rate of commission than the 
broker and so has a greater interest in their success. 

Buying. Buyers situated outside the large markets 
often employ buying brokers in these markets to make 
day-to-day purchases between their own visits to the 
markets. In some trades, goods are made by small 
specialty producers. For example, the hardware whole- 
saler often handles goods made by 1,000 or more pro- 
ducers. Many of these producers are too small to keep in 
constant touch with the wholesalers. The hardware 
wholesalers therefore often employ purchasing agents to 
make purchases and to give information regarding prices 
and sources of supply. 

Resident buyers. Resident buyers are purchasing 
agents in central markets who represent out-of-town de- 
partment and apparel stores. They purchase goods, 
especially apparel, for the stores between the visits of 
their buyers; find goods for the buyers' inspection; 
notify them of bargains ; and otherwise represent the in- 
terests of the stores. Most of them are paid commissions 
or monthly fees by the stores they represent, but some 
receive their commissions from the sellers. 

Commission merchants. The commission merchant is 
an agent who receives goods for sale on a consignment 
basis. He has the goods in his possession, sells them, 
and accounts to the owner for the proceeds of the sale. 
The distinction between the broker and the commission 
merchant is that the commission merchant has posses- 
sion of the goods. The commission merchant stores, de- 
livers, and often divides the goods; transfers title; 
collects payment and deducts his commission and ex- 



74 Brokers and Other Agents 

penses, such as freight; and remits the balance to the 
shipper together with an "account sales" of the trans- 
action. The distinction is clear, but it is not observed 
in the language of all trades. In the grain trade,, for ex- 
ample, grain is consigned to so-called "brokers" who are 
in fact commission merchants. 1 

Manufacturers' agents. Manufacturers' agents, as 
defined by the Census Bureau, are a type of broker who 
maintains continuous relations with the manufacturers 
whom he represents and sells their products in specified 
territories at prices named by them. They occupy a 
position between the free lance broker and the sales 
agent. 

Types of brokers. Brokers sell (or buy) merchandise, 
stocks and bonds, real estate, and insurance. Brokers 
selling goods are called merchandise brokers to dis- 
tinguish them from brokers selling securities, insurance, 
and real estate. Our discussion in this chapter will be 
limited to merchandise brokers. Brokers sell nearly all 
kinds of merchandise. They are found selling sugar, 
chemicals, canned foods, dried fruits, cream, fertilizers, 
textiles, confectionery, groceries, automobile accessories, 
mill supplies, fresh fruits and vegetables, grains, cotton, 
and so on. 



1 The fact that legal definitions are not followed in all trades should 
not cause us to lose sight of distinctions. A man may engage in 
different types of operations. He may buy and sell for himself; may 
receive goods on consignment; and may represent some sellers as 
brokers and others as sales agents. He may be called a "broker" or 
some other title. Regardless of the name, we should not fail to 
distinguish his different methods of operation. Confusion also comes 
from the fact that a man often changes his method of operation. 
When he changes his method, the old name may stick to him. To 
illustrate, fruits and vegetables were formerly shipped to a very 
large extent on consignment to commission merchants. Many of the 
dealers now do little or no commission business and yet they are still 
called "commission merchants." 



Brokers and Other Agents 



75 



Volume of brokerage business. The importance of 
various types of selling agents is shown by the Census 
figures in Table 2. The average operating expenses of 
the various agents are also shown. 

TABLE 2. BUSINESS OF SELLING AGENTS IN 1929 AND 1933 







- 19J9 






1938 


. 


Num- 


Kales Expenses 


Num- 


Sales Expenses 


Type of Agent 


ber 


(mil- 


%/ 


ber 


(mil- 


%of 






lions) 


Sales 




lions) 


Sales 


Brokers. 


3,689 


$ 4,038 


1.3 


3,414 


$2,OS8 


1.7 


Commission merchants 


3,479 


4,095 


2.3 


3,128 


2,225 


3.2 


Sales agents 


3,200 


2,623 


4.8 


1,235 


988 


4.2 


Mfrs' agents 


6,987 


1,775 


6.8 


4,972 


574 


6.8 


Export agents 


260 


399 


4.4 


240 


135 


4.2 


Import agents 


85 


57 


9.2 


179 


51 


6.4 


Other agents 


028 


670 




050 


4il 


2.7 


Totals and averages 


18,388 


$14,257 


3.2 


13,818 


$6,502 


3.2 



It will bo noted that the depression of the early thirties 
was hard on the business of selling agents, their number 
declining 25 per cent and their sales 54 per cent. Export 
agents, manufacturers' agents, and sales agents were 
especially hard hit. The number of import agents, how- 
ever, increased during this four-year period. A great part 
of the decline in sales, was, of course, due to a decline 
in prices. This was especially true of commission mer- 
chants, whose business probably declined very little in 
actual quantity of goods handled. 

The average expenses of the various types of selling 
agents for the years 1929 and 1933 are shown in Table 2. 
The expense figure excludes the salaries of proprietors 
and partners. In the case of small unincorporated con- 
cerns, such salaries take a very considerable portion of 
the agents' commissions and in fact constitute one of 
their largest expenses. 

Paid for their services. Brokers are ordinarily paid 
commissions on the goods bought or sold. The commis- 



76 Brokers and Other Agents 

sion may be a percentage of value or a definite amount 
for each unit of produce. Commissions vary with the 
size of sales customarily made, with the services ren- 
dered, and with the volume of business furnished by in- 
dividual employers (principals). Higher commissions 
are charged in trades where sales are commonly made 
in small quantities than in trades where sales are made 
in larger lots. Higher rates are often charged when 
brokers help to finance their principals than when no 
financial assistance is rendered. A large seller, by giving 
all of his business in a territory to one broker, may se- 
cure a lower rate of commission. 

Commissions range from a fraction of 1 per cent up to 
5 per cent or more, sales agents often receiving higher 
rates of commission than brokers. In the sale of canned 
foods, for example, brokers are frequently paid 2 per 
cent, while sales agents often receive 5 per cent. The 
broker may receive so much per car, per bushel, per 
dozen, or per pound. The rate on potatoes may be $10 
a car, while the rate on eggs may be % to %>$ per dozen. 
On the sale of grain, rates may be from 15 to 25 cents 
per 1,000 bushels. 

Commission merchants perform more services than 
brokers and therefore ordinarily receive higher rates of 
commission. Rates of 5 to 10 per cent are common. On 
the sale of consigned grain in Chicago, the commission 
merchants ("brokers") receive 1 per cent with l 1 /^ per 
bushel as a minimum on wheat and 1^ on corn. 

Functions performed by brokers. The broker per- 
forms primarily a selling (or buying) function. He finds 
buyers, negotiates price, and gives advice. He ordi- 
narily does little to create demand. 

In addition to selling, the broker sometimes helps to 



Brokers and Other Agents 77 

finance his employer (principal). He may endorse his 
employer's notes, may loan him money, may guarantee 
accounts for goods sold, or may advance money against 
goods. The sales agent, however, more often finances 
his employer than does the ordinary broker. 

At times the broker handles goods. The seller may 
have orders for only a part of a car and yet may ship 
an entire car to secure the lower freight rate. The 
broker tries to sell the rest of the goods while they are 
in transit, and, if he cannot do this, he must care for the 
goods until they are sold. The broker often receives 
pooled cars, has the cars opened, and has the goods 
delivered to the buyers. 

The broker may collect accounts and represent the 
seller in disputes with buyers. Most of these are extra 
services, not included in a regular brokerage business. 
They are performed in order to secure satisfied princi- 
pals. 

Place of brokers in trade channel. The broker usu- 
ally represent manufacturers, mines, mills, importers, or 
country shippers, such as farmers' cooperative associa- 
tions. He usually sells to manufacturers, wholesalers, 
jobbers, chain stores, department stores, large specialty 
stores, exporters, mine operators, public utilities, con- 
tractors, or other large buyers. 

Operation of brokers. The broker is a specialized, 
independent salesman. He is specialized in that he sells 
only one product or a few closely allied products. He 
often 'operates in highly specialized lines that are little 
known to the average consumer. The selling broker is 
a salesman, and his main function is to sell. His chief 
assets are his sales ability, his relations with buyers and 
sellers, and his knowledge of market conditions. Brokers 



78 Brokers and Other Agents 

often operate as individuals, maintaining small offices, 
renting desk space, or handling the necessary correspond- 
ence from their homes. 

Other brokers are organized as partnerships and cor- 
porations. Some of the large brokerage concerns have 
suites of offices, forces of salesmen, stenographers, and 
clerks. A broker usually operates in only one city, al- 
though he may effect sales in other cities through other 
brokers. The sales agent, for example, may receive a 5 
per cent commission and pay 2 per cent of it to the 
brokers who make sales in various cities. 

The concern doing a strictly brokerage business needs 
little capital. It has only to pay operating expenses 
until sales are made and commissions collected. How- 
ever, if his employers are financed, considerable capital 
may be needed. 

Earnings of brokers. Since a broker is paid a com- 
mission on his sales, if his sales are large, his earnings 
will be large. If he makes few sales, he will have small 
earnings. Successful brokers often receive handsome in- 
comes, but unsuccessful brokers may earn so little that 
they leave the business or devote only a part of their 
time to it. 

Advantages of brokers' selling function, Brokers are 
employed to make sales because the seller is too small 
to maintain a satisfactory sales organization, because 
the brokers have valuable contacts with buyers, or be- 
cause it is cheaper to sell through brokers than to main- 
tain a sales organization. 

Service to small producers. Many small manufac- 
turers employ brokers, because they have limited capital, 
because they have limited sales, or because they know 
little about selling. Their volume of business is too 
small to justify a complete sales organization, and very 



Brokers and Other Agents 79 

often the operation of their plants requires all of their 
capital, time, and energy. Many good production men 
are poor salesmen. It is logical for concerns in the hands 
of such men to employ sales agents who may take over 
the entire marketing of their goods. When such pro- 
ducers become larger, they often employ brokers and 
exercise a general supervision over selling activities. 
When they become still larger, they often establish their 
own sales organizations and do without brokers. 

A cannery, for example, is often owned by a man who 
knows little about marketing. His time is occupied with 
the operation of the cannery, and the most practicable 
way for him to sell his canned goods is to employ a sales 
agent or a broker to dispose of them. 

A cotton mill may be started in a small town by local 
capital. The company hires as manager an experienced 
mill man whose time is fully occupied in managing the 
mill. Besides the fact that he is fully occupied, he 
probably knows little about marketing. The logical way 
to sell the output of the mill is through sales agents or 
brokers. They are in the market continually. If the 
manufacturer depends entirely on traveling salesmen, 
he is likely to lose some sales because his salesmen are 
not always on hand when the purchasers are ready to 
buy. 

Advice. The advice given by brokers is often very 
valuable to their principals. In fact, some concerns 
employ brokers primarily for their information and ad- 
vice. These brokers often study supply and demand 
factors carefully and are in daily and hourly touch with 
prices. This enables them to predict future price mpve- 
ments with some assurance information that is often 
valuable to business men. They know the actual prices 
at which goods can be bought or sold, whereas it is 



80 Brokers and Other Agents 

sometimes hard for one not in constant touch with the 
market to secure this information. Published prices are 
not always the actual prices at which goods are being 
sold. 

Cost of brokers. It may be cheaper to sell through 
brokers than to maintain a sales organization. To illus- 
trate, a manufacturer may sell $10,000 a month in a 
certain territory. He pays his broker 2 per cent, or 
$200, a month for securing this business. It would cost 
the manufacturer $400 or $500 a month to keep a 
salesman of the necessary ability in this territory. It 
would cost something like $1,000 a month to open a 
branch sales office in charge of a competent manager. 
If the manufacturer places his own salesman in the 
territory and he does not increase sales, selling expense 
will be 4 or 5 per cent; while if he maintains a branch 
sales office, his selling expense will be 10 per cent. If 
this manufacturer decides to substitute his own salesman 
for the broker, this salesman will have to more than 
double the volume of sales to hold his selling expense 
down to 2 per cent. If he opens a branch office, he will 
have to secure five times as much business to hold his 
selling cost down to 2 per cent. 

Disadvantages of brokers. One reason why brokers 
are not more widely used is that they do not sell enough 
goods to satisfy their principals. Brokers are accused 
of loafing on the job. It is said that they go after only 
the big orders, that they take only the business that 
comes to them; in short, that they do not work the 
market thoroughly. The manufacturer referred to above 
may feel that the territory should yield much more than 
$10,000 business a month. He may place his own sales- 
men in the territory to increase sales even if the per- 
centage of selling cost is increased. 



Brokers and Other Agents 81 

On his side, the broker says that he can devote to an 
account only the amount of time that the sales justify. 
If the manufacturer wants more effort put behind his 
goods, he should pay the broker more. The manu- 
facturer replies that if the broker would work harder, 
he would make larger sales and thus earn larger com- 
missions. The manufacturer cannot, however, expect 
the broker to do a lot of promotional and missionary 
work for 2 or 3 per cent. 

The brokers are also accused of selling purely on a 
price basis. It is said that the only sales argument they 
know is a low price: that they know little about selling 
on a basis of quality. 

Social value of brokers. The broker is useful in sell- 
ing for small producers. He operates on a relatively 
small margin. He has relatively low expenses, owing to 
the large average size of his sales and the fact that he 
does not handle the goods. The consumer, therefore, 
is benefited when the broker displaces middlemen with 
higher operating expenses. 

The brokers may be criticised for encouraging specu- 
lation. Some brokers induce people to speculate in order 
to earn commissions on the transactions. Almost any 
commodity can be used for speculation grain, potatoes, 
onions, eggs, or real estate. Brokers may urge people to 
purchase such commodities in the belief that prices will 
advance. Many argue that such speculation is opposed 
to the public interest. Brokers not only encourage others 
to speculate but often speculate themselves by buying 
goods. Those who follow this practice regularly are 
called merchandising brokers. 

The broker may divide the goods and pass them on 
toward the consumer in smaller lots. If he does this, 
he is performing the functions of a wholesaler. Many 



82 Brokers and Other Agents 

of his merchandising transactions are, however, purely 
speculative and hence of very doubtful value. Census 
figures show that about 12 per cent of the sales of brokers 
consisted of goods handled on a merchandising basis. 

We commend the broker for his regular or legitimate 
selling (or buying) activities, but condemn his specula- 
tive activities. 

Commission merchants. Commission merchants are 
important in the sale of many commodities. Most of 
the livestock is consigned to commission men located at 
the stockyards in central markets. Approximately 70 
per cent of the grain reaching central markets is sold 
on a commission basis. Butter, fruits, and vegetables 
are often sold by commission merchants. Many manu- 
factured products, such, for example, as Mazda light 
bulbs, are sold on a consignment basis. Some manu- 
facturers sell on a commission basis in order to control 
resale prices or to induce the merchants to carry ade- 
quate stocks of goods. 

Commission merchants, however, are said to do less 
business than formerly. Many wholesale buyers have 
established buying facilities at country points, so that 
the farmers or country shipper of farm products do not 
have to consign their products to a commission merchant 
in a central market. Many farmers' cooperative organi- 
zations have established selling organizations in the cen- 
tral markets. 

At times there has been much dissatisfaction with 
commission merchants, because of the low prices received 
on sales made by them. Many shippers consign only 
when local prices are unsatisfactory. If the farmer or 
country shipper is offered a satisfactory price at the 
country point, he will be likely to sell there. If, however, 
the local price is low, he may consign his goods to a 



Brokers and Other Agents 83 

commission merchant, hoping for a better price. The 
price is probably low because the market is oversupplied. 
Unless the oversupply disappears while the goods are 
in transit, the commission merchant is very likely to 
have to sell at a low price. The shippers are naturally 
dissatisfied and blame the commission men. 

The commission men have also been accused of dis- 
honest and unfair practices. They have been accused 
of making false returns to shippers; of buying the goods 
themselves at low prices and then reselling for a profit; 
and of selling their own goods and allowing consigned 
goods to spoil. There have undoubtedly been dishonest 
commission men, but the commission merchants say that 
the percentage of dishonest men is no higher among 
commission merchants than among other groups. 

The Federal government and some of the states have 
provided for their regulation. Those handling perishable 
agricultural products in interstate commerce are licensed 
by the Federal government, and their operations are 
subject to inspection by public officials. 

Chapter 5 
Review Questions 

1. Define an agent; a broker. What are the different 
types? 

2. Define a sales agent; a resident buyer. 

3. Define a commission merchant. 

4. How are brokers paid for their services? Why do the 
rates of commission vary? 

5. What is meant by saying that the broker is a func- 
tional middleman? What functions do brokers perform? 

6. What place does the broker occupy in the trade chan- 
nel? How are brokerage concerns organized? 



84 Brokers and Other Agents 

7. How are a broker's earnings determined? 

8. Why are brokers used? Are brokers more likely to be 
employed by small or large manufacturers? Why? 

9. Why is it that a manufacturer can at times sell with 
less expense through a broker than through his own salesmen? 

10. What kind of advice does a broker give? Why is this 
valuable to the principal? 

11. Why are buying brokers employed? 

12. Why is it that a broker sometimes finances his princi- 
pals? 

13. What are the disadvantages of selling through brokers? 

14. What can you say of the value of brokers from a public, 
or social, viewpoint? 

15. In what trades are commission merchants important? 
Why has the business of commission merchants declined? 

16. Why have the shippers at times been dissatisfied with 
commission merchants? 

17. Under what conditions is the sale of goods through 
commission merchants likely to be satisfactory? 

Thought Problems 

1. What traits of character or qualities are necessary for 
success in the brokerage business? 

2. How can a young man become a broker? 

3. Why is it that manufacturers often employ sales agents 
when they are small and then discharge these agents and 
establish their own sales organizations when they become 
large? 

4. It has been said that the brokers cannot create demand 
that they are best suited for selling staple products to large 
buyers on a price basis. On their side, the brokers say that 
they can create a demand if they are paid for doing it. They 
point out that little promotion work can be done for 1, 2, or 
even 5 per cent. If the manufacturer advertises his product 



Brokers and Other Agents 85 

and employs missionary men, his expenses will be much 
above 5 per cent. 

The broker also says that if he expends a lot of energy on 
a brand and builds up a big demand for it, the manufacturer 
may take its sale away from him and not allow him to profit 
from his efforts. 

Comment on these statements. Under what conditions 
would you employ a broker to create demand for goods sold 
under your brand? 

5. Can a manufacturer sell more cheaply through his own 
salesmen or through a broker? Discuss. 

6. If brokers sell at less expense than manufacturers' 
salesmen, should their operations be encouraged? 



CHAPTER 6 

Auctions, Exchanges, and Speculation 

Auctions 

Two kinds of sales. Sales may be made in two ways : 
privately between buyer and seller; and publicly, the 
goods being sold to the highest bidder. Public sale in- 
volves more formality than private sale. The seller is 
supposed to announce the rules of the sale in advance 
and then to sell to the highest bidder who conforms to 
the rules, unless the rules allow the goods to be with- 
drawn or bids to be refused. 

Most of us are familiar with some type of auction 
sale. In the rural districts there are frequent auctions 
of livestock, household goods, and farm equipment. In 
the cities there are auctions of real estate, used furni- 
ture, art goods, and antiques. 

Characteristics of public sales. Public sales are open 
to the public. Anyone is free to come arid bid. The 
goods must be sold to the highest bidder, unless the 
seller reserves the right to reject bids. A common rule 
is that a sale must be made if two bids are received. 
Goods sold at auction are usually sold "as is" that is, 
the buyer takes the goods just as they are and the seller 
does not guarantee them in any way. Goods that are not 
standardized, and goods without known values, such as 
rare books and paintings, may be sold at auction. On 
the other hand, some argue that since goods are not 

86 



Auctions, Exchanges, and Speculation 87 

guaranteed, more buyers will be attracted and higher 
prices will be received when standardized goods are sold. 
As the goods are not guaranteed, the buyer should be 
given a full opportunity to examine them. If this oppor- 
tunity is denied, the buyer may well be suspicious of the 
sale. 

The auction sale brings into play an element of crowd 
psychology that is lacking in private sales. People in 
a crowd do not always think clearly, nor do they like to 
be outdone in public. Thus if two or more bidders start 
bidding for an article, they may bid more than it is 
worth. On another article the bidding may be listless, 
and the article may be sold for less than its value. Prices 
received at auction may vary widely. The hope of get- 
ting bargains is one of the main factors attracting people 
to auctions. 

The law of supply and demand is said to work more 
freely in public than in private sales. The supply is 
known and the price realized depends upon the bidding 
of the buyers. The auction seller says something like 
this: "Here are the goods. Take them for what you 
think they are worth." 

To be successful, auctions must be well attended by 
buyers and must have their confidence. 

Functions of public sales. The auction performs pri- 
marily a selling function. It finds buyers, negotiates 
price, and transfers title. Other functions that may be 
involved are dividing, storing, financing, assembling, and 
transporting. Auction sales at times establish market 
prices which are followed at private sales. 

Importance of auctions. The auction is an old 
method of selling. It has apparently declined somewhat 
in relative importance, but is still of much greater im- 
portance than is realized by some people. Real estate; 



88 Auctions, Exchanges, and Speculation 

livestock; antiques, rare manuscripts, pictures, and 
books; furs; used furniture and rugs; salvaged stocks; 
used farni machinery; tobacco; eggs; and fresh fruits 
and vegetables are often sold at auction. The Census 
reported 404 wholesale auction companies in the United 
States in 1929, with sales of $352,324,000, which was an 
average of $872,000 per auction. Fruits, vegetables, and 
tobacco make up a large part of the goods sold at auction. 
Furs are another important product sold at auction. The 
world's wool market centers in the wool auctions held 
in London and other cities. 

Types of auctions. Since auctions are open to the 
public, they cannot technically be divided into whole- 
sale and retail sales. Practically, however, wholesale 
auctions are established by fixing the minimum amounts 
of goods that can be bought so large that only dealers 
can buy. Auctions may be classified into those held 
regularly, as every day, every week, every month, or at 
definite times during the year; and those held irregularly. 
Irregular sales may be announced to sell bankrupt stocks, 
livestock, salvaged goods, real estate, or used goods. 

We are particularly interested in wholesale auctions, 
which are held regularly and so become an established 
part of our marketing system. The fruit auctions are 
perhaps the largest and best known of the regularly 
established wholesale auctions. 

The fruit auctions. These auctions sell both fruits 
and vegetables but are especially important in the sale 
of oranges, grapes, lemons, boxed apples, grapefruit, 
and bananas. Approximately one-third of all the fruit 
shipped by rail is sold at auction. 

Fruit is auctioned off in carlots and in less-than- 
carlots. With the exception of California grapes, most 
of it is sold in less-than-carlots at auctions located in 



Auctions, Exchanges, and Speculation 89 

12 or 15 of our large cities. In these less-than-carlot 
auctions, the fruit is unloaded from the cars and stacked 
in rows in warehouses. The lids are removed from top 
boxes for inspection. After inspecting the fruit, the 
buyers go to the auction rooms where the sales are held. 




Courtesy Pennsylvania, Railroad. 

Fig. 4. Fruit unloaded from the cars and awaiting inspection 
of the buyers prior to its sale at auction. Note that the lids are 
removed from one-half of the lugs (boxes) of grapes in the top rows 
to allow inspection. 

Catalogs are printed, arranged by carlots. Each carlot 
is divided into lots, or lines, and the fruit is sold by lines. 
All the fruit in one car is sold before a second car is 
offered. Sales are made with such rapidity that a score 
or so of cars may be sold in an auction lasting for perhaps 
a couple of hours. 

Position in trade channel. The fruit auction sells fruit 
for cooperative associations, auction receivers who rep- 



90 Auctions, Exchanges, and Speculation 

resent country shippers, wholesalers, and commission 
merchants. Sales are made to jobbers; chain stores; 
brokers representing retailers, institutions, and others; 
wholesale grocers; hucksters; and others who buy in 
large enough quantities to justify spending the time 
necessary to attend the auction. 




Courtesy U. S. Dept. Agriculture. 



Fig. 5. Interior of a fruit auction. Note the clerks on both sides 
of the auctioneer to record the sales, and note the platform in front 
of the auctioneer on which goods may be displayed when necessary. 

Charges. These auctions are privately owned and 
operated for profit. The seller pays the auction company 
on a commission basis, usually from l l / 2 to 2 1/2 per cent. 

Value of auction company's services. There has been 
a considerable discussion of the value of the auction's 
services and of the efficiency of the auction as a piece of 
marketing machinery. Many have been impressed with 
the economy in its operation. An organization selling 
for iy 2 to 2 l /2 per cent appears to furnish an economical 



Auctions, Exchanges, and Speculation 91 

marketing method. One auctioneer sells as many goods 
as several salesmen selling privately, which means low 
selling expenses. Other expenses, however, are involved. 
Out-of-town sellers must ordinarily employ representa- 
tives to look after their interests at the auction, and the 
buyers must spend much time attending the auctions or 
must employ brokers to buy for them. 

Complaints of abuses in the conduct of the auctions 
have been heard. The goods of certain sellers may be 
favored in the sale, the sellers may bid in their own 
goods, the auctioneer may favor certain buyers, or goods 
may be withdrawn from sale to raise prices. 1 These com- 
plaints apply to auctions in general and not particularly 
to fruit auctions. 

Some of the advocates of the auction system have been 
so impressed with its efficiency that they have advocated 
its extension to all large markets and to other commodi- 
ties. To secure fair operation and greater confidence 
from the buyers, some have proposed that the auctions 
be regulated by the government. One proposal is that 
any farmer or country shipper be allowed to ship goods 
to the auction company for sale, or to a public official 
who would have them sold at auction. This would 
assure the owner of an outlet for his goods, but there 
would, of course, be no assurance that he would be 
satisfied with the price received. 

The auctions are very interesting parts of our market 
structure. When fairly conducted, they seem to market 
goods economically. The subject of extending their 
operations should be carefully studied. 



1 Other abuses reported at times are selling some goods privately 
before the auction starts, and the announcement of fictitious bids by 
the auctioneer, 



92 Auctions, Exchanges, and Speculation 

Commodity Exchanges 

A commodity exchange is an organization which pro- 
vides facilities for trading in certain staple kinds of 
produce by its members. The facilities consist of a 
meeting place, a force of employees to keep records and 
handle the details of operation, rules regulating the 
conduct of business by members, and information con- 
cerning supplies and prices. The exchange itself does 
not buy or sell, nor does it handle the goods physically. 
It merely provides facilities for trading by members. 

In the public mind the exchange is associated with 
the activities of people who buy and sell on its floor. 2 
In judging the value of exchanges, we must consider 
both the operation of the exchanges and the trading that 
centers around them, which is often speculative. A con- 
sideration of the exchanges therefore leads to a discussion 
of speculation. 

Exchanges distinguished from auctions. In some 
respects the exchanges resemble auctions. There are, 
however, several differences. An auction is open to the 
public; an exchange is open only to its members. The 
auction is conducted under very loose rules; the ex- 
change has very strict rules. In an auction, the auction- 
eer does all the selling. In an exchange any member is 
free to sell. In an auction, goods offered for sale go 
to the highest bidder (unless a right to reject bids is 
retained by the seller), while on an exchange, the seller 
names the price which he is willing to accept. 

Products handled. Some of the commodities bought 
arid sold on exchange floors are grains (wheat, corn, oats, 



2 A commodity, or produce, exchange must not be confused with 
farmers' cooperative associations, which are frequently called exchanges. 
In order to avoid confusion in this volume, the word "exchange" is 
not used to refer to farmers' organizations. 



Auctions, Exchanges, and Speculation 93 

rye, barley, and flaxseed), cotton, butter, eggs, pork 
products, cottonseed oil, rubber, raw silk, sugar, cheese, 
coffee, cocoa, tin, hides, copper, lead, and zinc. Ex- 
changes are located in nearly all large cities. Some 
of the more important ones are: the Chicago Board of 




Courtesy Chicago Board of Trade. 



Fig. 6. Trading floor of a large commodity exchange the 
Chicago Board of Trade. 

Trade; the Minneapolis Chamber of Commerce; the 
New York Cotton Exchange; the New Orleans Cotton 
Exchange; the New York. Mercantile Exchange; the 
Chicago Mercantile Exchange; the Commodity Ex- 
change, Inc.; the Coffee, Sugar, and Cocoa Exchanges; 
and the Kansas City Board of Trade. 

Call and continuous markets. Exchanges operate in 
two ways. Some hold meetings at a definite hour each 
day or each week, and some are open continuously 
several hours daily. 



94 Auctions, Exchanges, and Speculation 

The former is known as the call method. Under this 
method business is conducted with the help of a black- 
board (hence the name "board" which is often used as 
a name for commodity exchanges). Members who have 
goods to sell offer them at certain prices. These prices 
are written on the board. Other members who want 
these goods bid for them. The bids are also written 
on the board. If the bids are as high as the prices 
offered, sales are made. When all offers and bids are 
made, the meeting is adjourned until the next meeting 
time. The call method is used principally by the smaller 
exchanges. 

Spots and futures. The business transacted on the 
floors of the exchanges is of two kinds. First, there is 
the spot, or cash, business, when sales are made for 
immediate delivery. Second, there are contracts made 
for the sale of products during some future month ; these 
contracts are known as futures. 

In regard to spot sales, the exchange is really a meet- 
ing place where dealers gather at specified times and 
buy and sell from each other, sometimes using the call 
method. The actual goods are not at the exchange. 
Sales are made from samples, by grades, or by both 
sample and grade. In the latter case, the seller displays 
samples of his goods (oats, for example) which have been 
graded by the licensed inspector and assigned a definite 
grade, such as No. 4. It is apparently economical for 
the buyers and sellers to have a definite meeting place. 
It saves time in getting together. Sales by grade and 
sample save time in inspecting and handling the goods. 
Business conducted on the exchange is conducted under 
strict rules. The dealers were formerly accused of meet- 
ing on exchanges and arbitrarily fixing prices. This prac- 



Auctions, Exchanges, and Speculation 95 

tice, however, has been stopped, and relatively little 
complaint is now heard against the spot markets con- 
ducted by the exchanges. They are generally endorsed 
as an efficient marketing method. 

In regard to future sales, the exchange provides a 
meeting place where its members make future contracts, 
and it provides rules that make reasonably sure of the 
fulfillment of the contracts. 3 The future markets estab- 
lished by the exchanges are used for two purposes: 
speculation and hedging. These are discussed below. 

Future trading. The controversy over the value of 
the exchanges centers in future trading. Most of the 
speculation and most of the alleged manipulation of 
prices occur in the future markets. 

Speculation on future markets is alleged to be one of 
the worst forms of gambling. It is alleged that the spec- 
ulators arbitrarily manipulate prices to their own ad- 
vantage and against the interest of the farmers. The 
speculators are supposed to depress prices when the 
farmers are selling their crops and then later on boost 
them. On this point, Senator Capper has said: "In 
three short months last summer (1928), the grain gam- 
blers on the Chicago Board of Trade mulcted the grain 
farmers of Kansas out of $75,000,000 through a legalized 
gambling device in which the wheat grower neither draws 
cards nor is allowed to shoot dice. He only furnishes 
stakes in the game and, no matter who among the 
gamblers win, the grower loses. It is an economic crime, 
a business blunder, and legislative insanity to allow this 
condition to continue." 



3 Insolvency of a brokerage house may mean that a contract is not 
fully satisfied. 



96 Auctions, Exchanges, and Speculation 

In favor of future trading, it is pointed out that it 
makes hedging possible. Further, it is said to stabilize 
prices and to give an indication of the level of future 
prices. 

Speculation 

Speculation is an attempt to make a profit from a 
change in price and not by performing a service. Specu- 
lative contracts to buy or sell goods can be easily made 
at all times upon the floors of the larger exchanges. It 
is not necessary for the speculator to put up enough 
money to cover the entire price of his purchase or his 
sale. He simply puts up enough money with his broker 
to cover probable fluctuations in price. This amount is 
called a margin. 

Marginal dealing. Marginal dealing enables one to 
increase the amount of his trading. Suppose that a 
man has $1,000 and wishes to speculate in wheat, which 
is $1 a bushel. If he had to pay the entire purchase 
price, he could buy only 1,000 bushels. Suppose he buys 
1,000 bushels and the price advances to $1.05. He has 
made a profit of 5^ a bushel, or $50. But suppose he 
can buy this wheat on a margin of 10 per cent of the 
price. His $1,000 will serve as a margin for 10,000 
bushels. If the price rises 5^, his gain is increased 
tenfold- to $500. Similarly, his loss will be ten times 
greater if the price declines. 

Short selling. When one speculates in actual goods, 
he must ordinarily buy the actual commodity and hold 
it for an advance in price. Future trading involves 
dealing in contracts for future execution. This makes 
it possible to contract to sell a product which at the 
time one does not own. One does this when he believes 
the price is going down. If wheat is $1 a bushel and 



Auctions, Exchanges, and Speculation 97 

he believes that the price will drop to 95^, he orders 
his broker to sell wheat. He hopes that the price will 
drop and that he can repurchase the wheat at a price 
of less than $1 to deliver on his contract at $1. 

Marginal dealing and short selling are made possible 
by future trading on organized exchanges. They are 
seldom found in ordinary private sales. 

Evils of speculation. Speculation is not without 
attendant evils. People lose money that is needed for 
living expenses, better homes, and education. Embezzle- 
ment, broken health, and suicide are often caused by 
speculative losses, and much harm is likewise done by 
speculative profits. Stories of large gains are widely 
circulated much more widely circulated than the stories 
of losses. These stories excite others to try to make 
money without working, thus limiting industry and dis- 
couraging thrift. No real advancement can be made 
without work, and the attempt to live without it is bad 
both for the individual and for society. Very few suc- 
ceed. Those who do usually spend the money unwisely 
and set a bad example for others. Those who fail at 
best lose money which they could have put to better 
purpose; at worst they are led to crime or premature 
graves. 

Speculation takes time and mental energy that could 
be spent to much better advantage. Just think what 
could be accomplished if all the time and attention spent 
in speculation, in following prices, and in listening to 
gossip and tips were devoted to a useful purpose ! Spec- 
ulation is a kind of contagious disease. It affects many 
who only pretend to speculate who speculate only in 
their minds for imaginary profits. 

The machinery necessary to carry on speculation is 
expensive. It has been estimated that the direct cost 



98 Auctions, Exchanges, and Speculation 

of conducting one speculative market the Chicago 
Board of Trade is over $20,000,000 a year. 

If speculation has so many evils, why is it not abol- 
ished? Congress would probably have abolished it long 
ago except for one fact it permits hedging. 4 

Hedging. Hedging supplies a kind of insurance 
against price changes. The insurance companies issue 
policies against many hazards, such as fire, rain, hail, 
tornado, and theft, but they do not write policies against 
changes in prices. Hedging is possible only when future 
trading exists. 

Hedging is the future sale or purchase of goods to 
offset or balance dealings in the actual product. It 
ordinarily involves a purchase and a sale of the same 
amount of the same commodity in two markets the 
spot market and the future market. A simple example 
of hedging is furnished by a grain elevator that pur- 
chases wheat. If the price of this wheat drops while 
it is owned, the elevator will lose money. To avoid this 
danger, the elevator may sell an equal amount of wheat 
for future delivery. Now if the price of wheat drops, 
it will lose money on the wheat in storage, but it can 
buy wheat for delivery on its future contract at a lower 
price and so make a profit on the future sale equal to 
the loss on the actual wheat on hand. 

Hedging illustrated. Let us assume that in a central 
market on July 1 the price of September wheat is $1 
a bushel, that the freight rate to this market from a 
country point is 10^ a bushel, and that the elevator 
located at the country point needs 5^ a bushel to cover 
its operating expenses and its profit. The elevator offers 



4 Speculation is usually legal because the contracts call for actual 
delivery of goods. As a matter of fact, however, few goods are de- 
livered on future contracts. 



Auctions, Exchanges, and Speculation 99 

the farmer 85^ a bushel. On July 1, it buys 1,000 bushels 
of wheat at 85^. Now if the price goes down, it will 
lose money. To prevent this, it sells 1,000 bushels of 
wheat for delivery in September at the future price 
of $1. 

On August 1, the wheat reaches the central market and 
is sold. The spot (cash) price is 90^. The elevator loses 
10^ a bushel on the spot wheat. If it had not hedged, 
therefore, its loss would be $100. 

The price of September wheat has also probably de- 
clined, perhaps to 90^. The elevator buys in its hedge 
at 90^ and makes a profit of 10^ a bushel, or $100, on its 
future contract. The profit on the future offsets the loss 
on the spot transaction, and the elevator has its 5$ mar- 
gin to cover operating expenses and profit. 5 

The account stands thus: 

Purchases 

July 11,000 bu. spot wheat @ 85*f $850 

Aug. 11,000 bu, Sept. wheat @ 90?f . . . . 900 

Total purchases $1,750 

Sales 

July 11,000 bu. Sept. wheat $1 . . . .$1,000 
Aug. 11,000 bu. spot wheat @ 9ty . . . . 900 



Total sales 1,900 



Difference between sales and purchases $150 

Freight to get wheat to central market 100 

Elevator's margin $50 



5 Hedging does not always work out in this way. The future price 
may be above the spot price or below the spot price at the time goods 
are purchased. As the future month approaches, the prices tend to 
come together. It is much more satisfactory for the owner of goods 
to hedge when future prices are above spot prices than when the op- 
posite is true. All grades of goods are handled, but hedges can be 
made only in the future (contract) grade. The prices of the varioua 
grades of a product do not always move together. 



100 Auctions, Exchanges, and Speculation 

Hedging can similarly be used to protect margins on 
future sales. Suppose a cotton mill sells cloth in March 
for August delivery, based on the price of cotton for 
August delivery which is 15^ a pound. It can buy cot- 
ton for future delivery in August for manufacture into 
cloth at 15^ and so protect itself against an advance in 
the price of cotton. 

Advantages of hedging. The advantage of hedging 
to the one doing the hedging is that it enables him to 
shift a part of the risk of price changes to others. This 
enables him to conduct his business on narrower mar- 
gins, which, in turn, enables him to pay more for the 
goods handled or to sell them at lower prices. Many of 
the products dealt in on exchanges are farm products. 
Hedging thus enables the buyers of these products to 
pay the farmers higher prices than they could if they 
had to assume the risks of price changes. 

Chapter 6 
Review Questions 

1. In what two ways may goods be sold? 

2. What are the characteristics of auction sales? 

3. What factors determine prices at an auction? 

4. What is meant by "as is"? 

5. What marketing functions are performed by auctions? 

6. What can you say of the importance of auctions in the 
United States? 

7. What are the different types of auctions? 

8. How do the fruit auctions operate? 

9. What position does the fruit auction occupy in the 
trade channel? 



Auctions, Exchanges, and Speculation 101 

10. What charges does the fruit auction make for its 
services? 

11. Is the auction an economical method of marketing? 
Does it help the sellers? Does it help the buyers? 

12. What is a commodity exchange? How does it differ 
from an auction? 

13. Distinguish between call and continuous markets. How 
does a call market operate? 

14. Distinguish between spot and future sales. 

15. Is the spot business desirable? Have any objections 
been made to it? 

16. What is future trading? 

17. Name the arguments for and against future trading. 

18. What is speculation? 

19. What is meant by dealing on a margin? 

20. What is meant by short selling? 

21. What are the evils of speculation? 

22. Why is speculation on organized exchanges allowed to 
persist? 

23. What is hedging? Illustrate. 

24. What are the advantages of hedging? 

25. What are the limitations on hedging? 

Thought Problems 

1. What types of auctions are held in your community? 
Are any of these held regularly? 

2. Sellers naturally have their goods sold in the way that 
they think will bring them the highest prices. Those who 
use the auction believe that they receive higher prices at 
auction than they would at private sale. Do you agree? 
Why or why not? 

3. It was stated in this chapter that out-of-town fruit 
.shippers have to have local representatives when they sell 



102 Auctions, Exchanges, and Speculation 

at auction. The auction companies do not like to act as 
consignees. It has been suggested that the auction companies 
act as consignees, receive goods direct from growers, and 
relieve out-of-town shippers of the expense of hiring repre- 
sentatives to protect their interests. Comment. 

4. It has been argued that speculation is justified because 
it gives pleasure to the speculators in other words, that the 
speculators use it for a game and not for a source of profit. 
Do you believe that speculation is justified by the pleasure 
that it gives to the speculators? 

5. Speculators have been called gamblers, and it is said 
that most of the speculation on the exchanges is gambling. 
On the other hand, some persons make a distinction between 
speculation and gambling. Can you draw a logical distinc- 
tion? 

6. Using figures, illustrate hedging transactions for the fol- 
lowing types of concerns: a country elevator; a flour mill; 
a cotton mill that buys cotton to cover its future needs. 



CHAPTER 7 

Wholesalers 

Wholesaler defined. A wholesaler is a merchant who 
sells to other merchants and to manufacturers, contrac- 
tors, hotels, institutions, and others who buy in large 
quantities. The wholesaler is a merchant; that is, he 
buys goods and has title to them and sells them in an 
attempt to make a profit. 

Place in trade channel. The wholesaler is ordinarily 
thought of as occupying a position in the trade channel 
between the manufacturer or the country shipper, and 
the retailer. Many wholesalers buy from manufacturers, 
brokers, country shippers, and farmers' cooperative as- 
sociations and sell to retail dealers. These wholesalers 
are often called jobbers. 

Other wholesalers handle industrial goods raw ma- 
terials, machinery, and equipment and sell to manu- 
facturers, contractors, mine operators, railroads, and pub- 
lic utilities. Some of these wholesalers are called "mill 
supply houses. " Many small manufacturers depend 
upon them for raw materials and equipment, while large 
manufacturers patronize them for fill-in lots which they 
need quickly. Industrial wholesalers handle such prod- 
ucts as machinery, cotton, wool, cloth, grain, flour, lum- 
ber, metals, leather, electrical equipment, and office and 
mine supplies. Many wholesalers, such as hardware and 
electrical jobbers, sell to both retailers and industrial 

103 



104 Wholesalers 

buyers. The operations of wholesalers handling indus- 
trial goods are discussed in Chapter 13. 

Usefulness of wholesalers. The wholesaler is a very 
useful merchant and is, in fact, almost indispensable to 
the smaller retailers. Most retailers handle goods made 
by hundreds of manufacturers, and many of them must 
buy in small quantities. The manufacturer cannot sell 
them such small quantities economically; nor can he, 
as a rule, supply them goods as quickly as the whole- 
saler. They must often buy on credit, and yet many 
have such poor credit ratings that many manufacturers 
are unwilling to take the risk of selling to them on credit. 

Wholesalers are also useful to the manufacturers, 
serving as the manufacturers' sales organizations and 
regional warehouses. Many specialty manufacturers are 
not in a position to solicit business from the retailers, as 
the selling expense would be too high. To illustrate, 
take the case of a manufacturer who has only one prod- 
uct which he sells to the retailers at 84(5 a dozen. The 
retailers ordinarily buy this product in quantities of one 
and two dozen. Let us suppose that this manufacturer 
employs salesmen to sell the retailers. They can visit 
only a few retailers each day, and they cannot sell all 
the retailers visited. They probably will not average 
more than 8 sales per day. If the sales average a dozen 
and a half each, the daily sales of each salesman will 
amount to only $10.08. His salary and expenses will be 
likely to average at least $7.50 a day. This would give 
the manufacturer a selling expense of 75 per cent. It 
is evident, therefore, that this manufacturer cannot prof- 
itably sell direct to the small retailers. The wholesaler, 
however, has many products to sell. The expenses of 
his salesmen are divided between hundreds of products 



Wholesalers 



105 



so that each has to pay for only a small part of the sales- 
man's time. 

Volume of wholesale trade. The Census has com- 
piled data for wholesale and retail trade for the years 
1929 and 1933. All non-retail middlemen are included 
in the wholesale census, which therefore includes not only 
wholesalers as defined above but also manufacturers' 
branch houses, brokers, chain store warehouses, and as- 
semblers of farm products. Nineteen twenty-nine was 
a year of business prosperity, whereas 1933 was a year 
of severe business depression. 

TABLE 3 SALES AND EXPENSES OF VARIOUS 
TYPES OF NON-RETAIL MIDDLEMEN 

Number Sales Per Cent 

Type of Middlemen* (in millions) Expense 

1929 19S3 1929 1938 1929 1933 



Wholesale merchants. . . 
Service wholesalers . . 
Exporters ........ 

Importers ...... 

Limited functional 
wholesalers ........ 



79,784 82,805 $29,288 $12,997 11.7 15.0 



74,47(5 

754 

2,202 



76,850 

453 

2,170 



2,292 3,380 



25,371 11,303 12.4 15.8 

1,508 558 3.8 6.1 

1,808 776 7.0 10.5 

601 360 9.6 11.5 



Manufacturers' sales 
branches 
With stocks 


17,086 
f 


16,873 
12,444 


16,336 
f 


7,557 
5,144 


9.8 
f 


12.5 
14.9 


Without stocks 


f 


4,429 


f 


2,413 


f 


74 


Bulk tank stations . . . 
Chain store warehouses 
Agents and brokers . . 
Assemblers and country 
buyers 


19,611 
559 

18,388 

34,226 


26,190 
462 
13,818 

23,962 


2,390 
1,930 
14,257 

4,749 


1,889 
1,432 
6,502 

1,774 


11.3 
4.3 
3.2 

4.5 


19.7 
4.5 

3.2 

9.8 


Assemblers of farm 
products 
Cooperative assns 
Cream stations 


21,884 
4,208 
f 


11,283 
2,732 
2,860 


2,304 
1,458 
t 


719 
686 
31 


t 

4.8 
t 


10.8 
9.6 
15.6 


Grain elevators 


8,134 


7,087 


987 


338 


t 


7.5 


Total 


169,654 


164,170 


$68,950 


$32,151 


8.9 


11.5 



* Establishments, not companies. One company may operate several establishments, 
t Figures not available, usually owing to a cnange in classification. 

It will be seen by the figures in Table 3 that the total 
number of establishments in the wholesale trade was 



106 Wholesalers 

169,654 in 1929 and 164,170 in 1933. Total sales were 
almost 69 billions of dollars in 1929 and over 32 billions 
in 1933. The percentage of expenses increased from 8.9 
to 11.5. This increase in percentage resulted from the 
fact that expenses are made up largely of wages, rents, 
taxes, advertising, interest on borrowed money, and pub- 
lic utility charges. The expenses for these do not vary 
with changes in the prices of goods. When the prices of 
goods increase or decrease, there is a lag in wages, rents, 
and taxes, in advertising, and in public utility rates. 
During this four-year period the actual expenses of the 
various types of wholesale middlemen decreased nearly 
40 per cent. However, volume of sales decreased 56 
per cent, so that the expense percentage increased. Of 
the decrease in the volume of sales, 31 per cent was due 
to a decline in the prices of the goods handled and 25 
per cent was due to a decline in the quantity of goods 
handled. As the volume of sales increases, from the low 
of 1933, we find the percentage of expense declining. 

Types of wholesale middlemen listed by Census. 
The principal types of middlemen listed in Table 3 are 
wholesale merchants, manufacturers' sales branches, bulk 
tank stations, chain store warehouses, agents and brokers, 
and assemblers of farm products. This chapter deals 
especially with the operations of wholesale merchants. 
Manufacturers' sales branches that carry stock are com- 
monly known as "manufacturers' branch houses/' and 
perform about the same functions as wholesale mer- 
chants and will not be discussed separately. Manufac- 
turers' sales offices that do not carry stocks more nearly 
resemble selling agents in the functions performed and 
methods of operation. Bulk tank stations are whole- 
sale middlemen engaged in the distribution of gasoline 



Wholesalers 107 

and oil They operate tank trucks and deliver to filling 
stations some are independent, but the great majority 
are operated by the oil refiners. Chain store warehouses 
are wholesale houses operated by chain stores, particu- 
larly grocery chains, to supply their retail stores. They 
operate in many respects like wholesale merchants, and 
will be discussed in Chapter 11. The operations of agents 
and brokers were discussed in Chapter 5. Assemblers 
of farm products differ in many respects from other types 
of wholesalers and will be discussed in Chapters 15-18, 
which deal with the marketing of farm products. 

Wholesale merchants. The Census divides wholesale 
merchants into four main groups: service wholesalers 
(called by the Census "wholesale merchants"), exporters, 
importers, and limited function wholesalers. The latter 
group includes cash-carry wholesalers, mail-order whole- 
salers, truck wholesalers ("wagon jobbers"), and drop 
shippers. It will be noted from the figures in Table 3 
that the number of both service and limited function 
wholesalers increased between 1929 and 1933. This is 
interesting in view of the fact that the sales of the serv- 
ice wholesalers declined 55 per cent and those of the 
limited function wholesalers 40 per cent. There was, in 
1933, one wholesale merchant to every 18 retailers and 
to every 1,500 people. Many of these wholesalers, how- 
ever, sell to industrial buyers, so that the wholesalers 
selling to retailers supply, on the average, more than 18 
stores. 

Goods handled. Wholesale merchants may be classi- 
fied according to the types of goods handled. Wholesalers 
are found handling almost every conceivable product 
from advertising goods to yarn. Some of the more im- 
portant types of goods handled are: automobiles and 



108 Wholesalers 

accessories, coal, drugs, dry goods, clothing, electrical 
goods, chemicals, grain, cotton, livestock, fruits and veg- 
etables, wool, eggs, poultry, groceries, meats, furniture, 
house furnishings, jewelry, shoes, leather goods, lumber 
and building material, machinery, paper, hardware, 




Courtesy Pennsylvania ItailroaiL. 

Fig. 7. A wholesale fruit and vegetable market which helps 
to supply the needs of a large city. Note that some of the cars 
are unloaded directly into the space where goods are sold by the 
wholesalers, and that other cars are on team tracks where the goods 
can be unloaded into trucks and hauled directly to the stores of the 
dealers, or from which the cars can be reconsigned to other markets. 

plumbing and heating supplies, tobacco, confectionery, 
dairy products, textiles, and metals. 

Some wholesalers handle full lines of goods. The hard- 
ware wholesaler, for example, may handle from 20,000 
to 80,000 items if sizes are counted. Wholesalers han- 
dling dry goods, electrical merchandise, groceries, drugs, 
stationery, and some other products carry thousands of 
items in stock. These are known as full-line wholesalers. 
There are, on the other hand, wholesalers who specialize 



Wholesalers 



109 



in certain products such as potatoes, butter, poultry, knit 
goods, and hats. These are known as specialty whole- 
salers. 

Ownership. With respect to ownership, wholesalers 
may be classified as independent or privately owned; 
manufacturers' branch houses; chain store warehouses; 




Courtesy V. S. Dept. Agriculture. 



Fig. 8. A jobbing and wholesale market from which a large 
city obtains a great part of its fruits and vegetables. 

and wholesale warehouses owned by independent retail- 
ers. Wholesale warehouses operated by manufacturers 
and chain stores are parts of integrated organizations 
and are not independent merchants. They, however, 
perform most of the wholesale functions. 

Territory. Some wholesalers cover large territories, 
occasionally the entire country. These are called sec- 
tional or national wholesalers. They often operate a 
number of warehouses. On the other hand, there are 



L10 Wholesalers 

wholesalers who cover only a small territory, one city, 
me county, or a part of a large city. These are called 
.ocal wholesalers. They often have lower expenses than 
;he national wholesalers as a result of more limited 
stocks, faster rates of stock turnover, less delivery ex- 
Dense, less expense for salesmen, or less service furnished 
;O customers. 

Method of operation. Wholesalers may be classified 
iccording to the method of operation or the services per- 
'ormed. Some of the types operating in different ways 
ire the service wholesaler, cash-carry wholesaler; truck- 
vholesaler or wagon jobber; and the mail-order whole- 
;aler. 

Functions performed. The functions performed by 
lifferent types of wholesalers vary considerably. The 
lervice wholesaler usually performs 9 or 10 of the 12 
narketing functions and may perform all 12. The 
;arlot wholesaler who handles goods in railroad cars, 
m the other hand, performs primarily the buying and 
selling functions and the general business functions of 
isking, financing, and recording. 

The service wholesaler. The service wholesaler is one 
vho carries goods in stock, who has a force of salesmen 
o solicit orders, and who extends credit to his customers. 
3 erhaps his most important functions are: storing, buy- 
ng, dividing, selling, extending credit to the retailers 
financing), packing, and delivering goods to the buyers 
'transporting). Risking and recording are, of course, 
nvolved. This type of wholesaler does not ordinarily 
itandardize or grade goods. 

Storing. The retailer expects the wholesaler to carry 
ully assorted stocks of goods so that he can obtain any 
lesired goods on short notice. Promptness in making 



Wholesalers 111 

deliveries is one of the main requisites for success in 
wholesaling. 

The wholesaler often reduces transportation costs by 
carrying stocks in strategic points. To illustrate, a man- 
ufacturer is located at X and a retailer at Y. The re- 
tailer's sales are too small to allow him to buy in 
carloads. The less-than-carload rate from X to Y may 
be $1 per 100 pounds. A wholesaler is located at Z. 




LCL rate 



He buys in carloads and receives a carload rate of 
from X to Z. He sells to the retailer at Y. To get the 
goods from Z to Y involves a less-than-carload rate of 
25^. The total freight from factory to retailer when the 
goods are handled by the wholesaler is 65^, whereas if 
they were shipped direct to the retailer by the manu- 
facturer, the freight would be $1. 

Buying. It is the wholesaler's job to know what his 
customers need, to find where the goods can be obtained, 
and to buy them at prices that will enable his retail 
customers to meet the prices of their competitors. 

Dividing. The retailers often want to buy goods in 
very small lots. The retailer often purchases slow selling 
goods by the case, half-case, dozen, half-dozen, quarter- 
dozen, or even in single units. The wholesaler is likely 
to receive orders for less than $5.00 that call for several 
different articles. The dividing and packing necessary 
to fill such small orders increase the wholesaler's expense, 

The retailer is often criticised for buying in such 



112 Wholesalers 

small amounts. Many of his orders are unnecessarily 
small. The retailer often divides his business among too 
many wholesalers. He is often a poor stockkeeper, and 
orders so often that he increases his own expenses for 
buying and transportation. Some wholesalers refuse 
orders from retailers who continually order in small lots. 
It is one thing to ask for a small "fill-in" item occasion- 
ally, but it is an entirely different matter when the 
retailer regularly orders in very small lots. 

Selling. The service wholesaler has a force of travel- 
ing salesmen who call upon the retailers and ask for 
business. The wholesaler's salesmen came into existence 
with the building of the railroads and for several decades 
traveled largely by train; today most of them travel 
in automobiles. Often these salesmen have been mere 
order takers. "What's on your want list today?" is too 
often the main part of their sales talk. The retailer 
could just as well order most of his staple merchandise 
by mail or telephone, for he knows his own needs. Why 
does the seller have to pay a man to come around and 
ask him for the order? Competition is the answer. The 
retailer will generally give his orders to the salesman who 
comes and asks for them. The chain store has no sales- 
men to sell to its retail stores and thus saves this selling 
expense. In spite of the criticism of the wholesaler's 
salesmen, however, they build goodwill for their em- 
ployer and give the retailers valuable advice. 

The manufacturer expects the wholesalers to sell his 
goods and has often been disappointed because they do 
not actively push his wares. He overlooks the fact that 
the wholesaler is in business primarily to supply the 
needs of the retailers and not to sell the product of any 
particular manufacturer. 

Specialty salesmen. Manufacturers are often dissat- 



a/? 




114 Wholesalers 

isfied with the volume of sales made by the wholesalers. 
Many employ their own salesmen to call upon the re- 
tailers from time to time and solicit business. These 
men are called specialty salesmen. The manufacturer 
thus assists the wholesaler in performing the selling 
function. 1 

Credit. The service wholesaler extends credit to the 
retailers. Many retailers have such limited capital that 
they could not stay in business without the credit ex- 
tended by the wholesalers. In fact, the wholesaler is 
often criticised for being too liberal with credit and 
inducing people to enter the retail business who have 
insufficient capital. 

Delivery. Many service wholesalers operate their own 
delivery trucks and deliver goods to the retailers within 
certain areas, often without extra charge. 

Cash-carry wholesalers. The cash-carry wholesaler 
carries goods in stock but does not give free delivery 
nor extend credit to retailers. He frequently does not 
have outside salesmen. The retailers come to his store, 
select their goods, pay cash for them and haul them 
home; or they may order by telephone and have the 
goods delivered on a C.O.D. basis. The cash-carry 
wholesaler eliminates the expenses of traveling salesmen, 
of extending credit and making collections, and of a 
considerable portion of the bookkeeping expense. 

In the grocery trade, service wholesalers ordinarily 
have expenses of from 8 to 12 per cent, while the cash- 
carry wholesalers have an expense of 4 to 5 per cent. 2 

1 In some cases the manufacturer performs the entire selling func- 
tion, the wholesaler being used only for storing, dividing, extending 
credit to the retailers, and keeping account of the transactions. The 
manufacturer's specialty salesmen apparently add to marketing expense. 

2 Census figures in the grocery trade for 1929 show average expenses 
of 9 to 10 per cent for service wholesalers and 3 to 5 per cent for cash- 
carry wholesalers. 



Wholesalers 115 

Although this indicates a saving of 4 to 7 per cent, it is 
not all net saving to the retailer, for he must go after 
the goods in his delivery wagon or pay for this delivery. 
He must also consider the interest on the money when 
he buys for cash. Nevertheless, there is a saving to the 
retailer on staple merchandise. In order to meet chain 
store prices, many independent retailers are patronizing 
cash-carry wholesalers, or cash-carry departments of 
service wholesalers. Figures for limited function whole- 
salers were published in the 1929 Census and are shown 
in Table 4. 

TABLE 4. SALES AND EXPENSES OF LIMITED FUNCTION 
WHOLESALERS IN 1929 

Number of Sales Ratio of Expense 

Type of Wholesaler Establish- (mil- Sales to (% of 

ments lions) Inventory Sales) 

Cash-carry 756 179 11.0 5.7 

Drop shippers 583 242 96.1 6.5 

Mail-order 41 46 6.0 22.6 

Truck ("wagon jobbers")... 817 90 32.1 18.8 

Truck wholesalers. Truck distribution has had a con- 
siderable growth in recent years, particularly in the food 
trades. Truck, or wagon, wholesalers carry the goods 
with them and sell and deliver as they call upon the re- 
tailers. They usually sell for cash or for very short 
credit periods. Truck wholesalers are found especially 
in the businesses of handling perishable foods and food 
specialties, such as cheese, salad dressing, potato chips, 
bakery goods, fruits, and vegetables. 

Much of the growth of truck distribution is due to 
the operation of trucks by manufacturers, especially in 
the distribution of gasoline, and foodstuffs bread, cakes, 
pies, ice cream, meat, coffee, salad dressing, and so forth. 

The drop shipper. The drop shipper, or desk jobber, 
is a wholesaler who buys and sells goods without having 



116 Wholesalers 

them in stock. He has title to the goods, so that he is 
a merchant and not an agent. He solicits orders and 
has the railroad (or truckman) deliver the goods to his 
customers. His method of operation saves warehouse 
expenses and he is found especially in the handling of 
heavy goods such -as building materials. When the drop 
shipper deals only in carlots, he may have expenses of 
1 or 2 per cent as compared with 5 to 20 per cent for 
the service wholesaler handling similar goods. 

The mail-order wholesaler. The mail-order whole- 
saler receives orders by mail and not by salesmen. He 
issues catalogs from which the buyers make their se- 
lections. This method of operation saves the expense 
of a sales force. Wholesalers receive many orders by 
mail. The Census, however, found very few whole- 
salers who secured the bulk of their business in this 
way. 

Semi-jobber. A semi- jobber is a merchant who con- 
ducts both a retail and a wholesale business in one es- 
tablishment. Semi- jobbers are important in the sale of 
hardware, farm implements, building materials, coal, 
office and store equipment, motor vehicles, and oil and 
gasoline. 

Mutual wholesalers. The mutual wholesaler is a pri- 
vate wholesale establishment in which the retailers buy 
stock or make deposits in order to secure buying privi- 
leges. The mutual wholesaler ordinarily does away with 
outside salesmen. Orders are received by telephone and 
by mail. Credit is limited, often to the value of the 
stock owned or the deposit made by the retailers. De- 
livery service is often limited or charged for extra. 
Overhead expenses are reduced by cheap-rent locations, 
modest fixtures, and a limited number of executives. 
Little of the slower moving merchandise is handled. The 



Wholesalers 117 

mutual wholesaler thus resembles the cash-carry whole- 
saler in some respects and has similar or slightly higher 
operating expenses. 

Operating expenses. The wholesaler's expenses are 
made up of expenditures for labor, rent, delivery, ad- 
vertising, traveling, light, heat, and so forth. These 
items he thinks of as his cost of doing business. From 
the standpoint of his customers and the consumers, his 
cost to them is measured by the entire margin which 
he takes between the price which he pays for goods and 
the price he receives for them that is, by his operating 
expenses plus his profit. Wholesalers, as a rule, have 
lower operating expenses than retailers, owing to the 
larger units in which goods are handled. A salesman 
can sell a dozen cases in about the same time as one 
can or package, %The carlot wholesaler has lower ex- 
penses than the jobber. The expenses of wholesalers 
vary with the size of the units in which goods are bought 
and sold and with the service rendered. 

The operating expenses of the wholesale merchants 
in the 20 trades having the largest volume of sales for 
1933 are shown in Table 5 on page 118. As previously 
indicated, operating expenses were high in this year. 

Expense and size. When the wholesalers are grouped 
by size as measured by volume of sales (Table 5), the 
average percentages of expense decrease as sales volume 
increases. This fact indicates that wholesaling is a busi- 
ness of decreasing cost that is, that the larger the 
volume of sales, the less the cost of doing each dollar's 
worth of business. This statement must not, however, 
be accepted without considerable modification. It may 
be that there is a difference in the services performed 
by large and small wholesalers. In 14 of the 20 trades 
shown in Table 5 there were too few wholesalers with 



118 



Wholesalers 



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Wholesalers 119 

sales of over $5,000,000 to allow averages to be computed. 
Out of 79,032 wholesalers covered by the Census figures, 
about 70 per cent had sales under $100,000; only 1,827 
reported sales of over $1,000,000; and only 45 houses 
reported sales of over $10,000,000. It is evident that 
the advantage of lower operating expenses is insufficient 
to produce any considerable number of large whole- 
salers. In many of the trades, medium-sized whole- 
salers have lower expenses than large wholesalers. From 
these facts we may conclude that on the average large 
wholesalers have somewhat lower expenses than small 
wholesalers, but that small and medium-sized whole- 
salers have certain advantages in contrast with large 
wholesalers. One of these advantages is their prox- 
imity to customers, thus permitting quick delivery of 
goods and frequent personal contacts with them. 

Location. Data gathered by the Census does not show 
any particular relation between a wholesaler's expenses 
and the size of the town in which he is located. In other 
words, a wholesaler in a large city may be able to operate 
as economically as a wholesaler in a small town in spite 
of the higher scale of wages in the city. 

Private brands. Many wholesalers have adopted 
brands of their own under which they sell a part of their 
goods. Many of the larger retailers, such as chain and 
department stores, also have their own brands. Such 
brands are often called private brands to distinguish 
them from the manufacturer's nationally advertised 
brands. Some of the private brands, however, have alsc 
been advertised. Goods for sale under private brands 
may be purchased from smaller manufacturers whc 
have not established their brands on the market, they 
may be bought from larger manufacturers who are un- 
able to sell all of their goods under their own brands 



120 Wholesalers 

or they may be produced in plants owned by the whole- 
salers or retailers. 

Advantages of private brands: Control. There are 
several reasons why wholesalers have their private 
brands. First, they own the brands, which cannot there- 
fore be taken from them by the manufacturer. Whole- 
salers have sometimes had the manufacturer take from 
them a brand which they had sold for years and sell it 
direct to the retailers or through exclusive agencies. The 
wholesaler must then take on other brands which are not 
so well known to his customers. 

Quality. The wholesaler is often unable to control 
the quality of goods sold under the manufacturer's name. 
When he sells goods under his own brand name, he 
claims that he can maintain a more uniform and a 
superior quality. This he says he can do because he 
can buy from various manufacturers. If the product 
of one declines in quality, he can buy from another. 
Tests of canned fruits and vegetables show no substan- 
tial difference in the quality of the goods sold under 
manufacturers' brands and under private brands. 

Price. Manufacturers' nationally advertised brands 
are frequently used as cut price leaders by retail stores. 
Other retailers are thus forced to insist upon buying such 
goods at prices low enough to enable them to meet the 
prices of cut-price stores, which often means that such 
goods are sold with little or no profit by" both whole- 
salers and retailers. Wholesalers, therefore, often resort 
to private brands to meet this situation. 

Goods to be sold under private brands can usually be 
bought cheaper than goods bearing the manufacturer's 
label. A study by the Federal Trade Commission shows 
that, as a rule, the wholesaler buys goods for his private 
brand at a lower price than goods under a manufacturer's 



Wholesalers 121 

well-known brand, sells them to the retailer at a lower 
price, and at the same time makes a larger margin. The 
retailer, in turn, buys goods under a private brand 
cheaper than similar goods under national brands, sells 
them at a somewhat lower price, and at the same time 
makes a larger margin. This is shown by the figures in 
Table 6, which give averages for groceries and dry goods. 

TABLE 6. COSTS, SELLING PRICES, AND MARGINS OF 
WHOLESALERS AND RETAILERS ON NATIONAL AND 

PRIVATE BRANDS 
(Federal Trade Commission's Figures) 

GROCERIES DRY GOODS 

National Private National Private 

Brand Brand Brand Brand 

Wholesaler's buying price.. .. $1.00 $0.85 $1.00 $0.85 

Wholesaler's price to retailer .. 1.13 0.99 1.19 1.05 

Retailer's price to consumer 1.45 1.32 1.80 1.63 

Margin, per cent of sales: 

Wholesaler 11.4 13.9 15.6 19.4 

Retailer 22.0 24.9 33.9 35.5 

It will be noted in these cases that the wholesalers 
bought goods for their own brands 15 per cent lower than 
similar goods bearing the manufacturer's label. In the 
case of drugs there was a difference of 19 per cent, and 
in the case of hardware, 16 per cent. 

If we take a nationally advertised grocery item that 
cost the wholesaler $1, a similar article could be pur- 
chased for sale under his own brand for 85 cents. The 
wholesaler sold the nationally advertised brand to. the 
retailer for $1.13, while he sold his private brand for 
99 cents. The retailer sold the manufacturer's brand 
to the consumer for $1.45, whereas he sold the private 
brand for $1.32. The consumer thus saved 13 cents 
by buying the private brand. The wholesaler made 11.4 
per cent margin on the national brand and 13.9 per 
cent on the private brand. The retailer made 22 per 



122 ' Wholesalers 

cent on the national brand and 24.9 per cent on the 
private brand. Both the wholesaler and retailer secured 
larger percentages of margin on the private brand and 
passed on a part of the saving to the consumer. 

Disadvantages of private brands. The manufacturer 
of nationally advertised goods does not admit the ad- 
vantages of private brands listed above. He claims that 
his goods are of superior quality to those sold under pri- 
vate brands. He says that a producer is more careful of 
the quality of goods bearing his own name than of 
goods sold under another's name. He also argues that 
there is so much consumer demand for his advertised 
goods that they can be sold at much lower expense than 
goods under unknown private brands. Even if the 
wholesalers and retailers make larger margins on private 
brands, he argues, they have larger expenses in selling 
them and so make more net profit on well-known nation- 
ally advertised goods. More time and sales effort are re- 
quired to persuade the customers to accept private 
brands than national brands which are widely known. 
He also says that the wholesaler must buy goods for his 
private brands in larger quantities and store them 
longer, so that the storage expense is higher and stock 
turnover reduced. 

Conclusion on private brands. Information at hand 
is insufficient to allow a definite statement to be made 
as to the cost of selling national and private brands. 
Many private brands are now well known in the terri- 
tories where they are sold and are generally accepted by 
the consumers. In such cases, little if any more effort 
is required to sell them than that required to sell na- 
tional brands. It does require more time to sell unknown 
brands than to sell brands which are well and favorably 



Wholesalers 123 

known; this is true whether the unknown brand is a 
private brand or a manufacturer's brand. 

Future of the wholesaler. Many manufacturers have 
established their own selling organizations and sell direct 
to the retailers. Unless they have several products to 
sell, their expenses of selling the retailers are likely to be 
higher than those of the wholesaler. Some manufac- 
turers sell direct to the retailers in spite of the higher 
cost, in order to put more sales effort behind their goods 
and secure a larger volume of sales. Large retailers, 
such as department and chain stores, often buy many of 
their goods direct from the manufacturers and use the 
wholesaler only for fill-in lots when they are out of stock. 
These transactions tend to reduce the volume of business 
done by the wholesaler. Some observers have predicted 
the eventual elimination of the wholesaler from the trade 
channel. As long as we have small retailers and small 
manufacturers, however, the wholesaler is a necessity. 
The small manufacturer cannot afford to sell direct to 
the retailers, and the small retailers cannot afford to con- 
tact the manufacturers. For this reason, we shall con- 
tinue to have wholesalers. 

When we talk about eliminating the wholesaler, we 
mean eliminating the independent wholesaler and not 
his functions. The wholesale functions appear to be nec- 
essary. When direct connections are established between 
the manufacturer and the retailer, the wholesale func- 
tions are shifted to either the manufacturer or the re- 
tailer. The manufacturer's branch house and the chain 
store warehouse are performing the wholesale functions. 
They may or may not be able to perform these functions 
more cheaply than the independent wholesaler. 



124 Wholesalers 

Chapter 7 
Review Questions 

1. Define the term "wholesaler. 7 ' How are wholesalers 
classified? 

2. What is the place of the wholesaler in the trade 
channel? 

3. What can you say of the wholesaler of industrial goods? 

4. Is there a distinction between a wholesaler and a job- 
ber? What is meant by a carlot receiver? 

5. Of what use is the wholesaler to the retailer? 

6. Of what use is the wholesaler to the manufacturer? 

7. What can you say of the importance of wholesalers? 

8. What functions does the service wholesaler perform? 
Which are the more important ones? 

9. Why should goods be stored near the points of con- 
sumption? 

10. How does the wholesaler perform the dividing func- 
tion? 

11. How does the service wholesaler perform the selling 
function? 

12. Is it cheaper for the wholesaler or the manufacturer 
to sell to retailers? Why? 

13. What are specialty salesmen, as the term is used in 
this chapter? 

14. Why do the manufacturers employ specialty salesmen? 

15. What are cash-carry wholesalers? Why do they exist? 
How do they reduce expenses? 

16. How do truck wholesalers operate? What services do 
they perform? 

17. What is a semi-jobber? 

18. What determines the costs of operating a wholesale 
business? 



Wholesalers 125 

19. Why can a wholesaler operate more cheaply than a 
retailer handling the same kind of goods? 

20. What is the relation between a wholesaler's volume of 
sales and his expenses? 

21. What is the relation of a wholesaler's expenses and the 
size of town where he is located? 

22. What are private brands? What are the advantages 
and disadvantages to their owners? 

23. What can you say of the cost of private brand goods 
to wholesalers, retailers, and consumers? What of the whole- 
saler's margin on such goods? 

24. What can you say of the quality of goods sold under 
private brands? 

25. What can you say of the future of the independent 
wholesaler? 

Thought Problems 

1. The manufacturer has often considered the wholesaler 
as his sales department. On the other hand, the retailer has 
thought of the wholesaler as his supply department. Which 
is correct? Why? 

2. Why do retailers buy in such small lots? Some manu- 
facturers and wholesalers have applied cost accounting to 
their activities and have refused to sell to retailers who buy 
in such small quantities that doing business with them is 
unprofitable. Is this a wise policy? How does it affect the 
retailers? 

3. The wholesaler has been criticised for extending credit 
too laxly, for setting people up in the retail business who lack 
sufficient capital or ability for success. If this is true, why 
are the wholesalers so lax? What proposals for improving 
conditions can you suggest? 

4. Manufacturers of advertised brands often allege that 
the quality of goods sold under private brands is inferior to 
that sold under nationally advertised brands. They say that 
the manufacturers often sell seconds to the wholesalers for 



126 Wholesalers 

their brands; that the manufacturer of goods sold under 
private brands is unknown to the public and hence that he 
has no incentive to maintain the quality of his goods; and 
that the wholesalers buy on a price basis and must take only 
what they can get to sell under their own brands. 

On their side, the wholesalers argue that the goods under 
their private brands are superior to those under the manu- 
facturer's advertised brands. They say that a manufacturer 
will at times secure poor goods owing to poor raw materials 
or labor troubles, whereas the wholesalers can buy wherever 
they can secure goods of the desired quality. They do not 
have to buy from any one factory. If one manufacturer's 
goods go bad, they buy elsewhere. Also, they can use greater 
care in selecting the goods than can large manufacturers who 
produce tremendous quantities. 

(a) Comment on these arguments. 

(b) Name some private brands and some manufacturer's 
brands used on similar goods. 

(c) Which do you believe to be of superior quality, goods 
sold under private brands or nationally advertised brands? 

5. The statement has been made that the wholesaler 
can be eliminated but that his functions cannot be eliminated. 
What does this statement mean? What do you think of its 
truth? 



CHAPTER 8 
Retailing 

Functions of retailers. The retailer is the merchant 
who sells goods to the household consumer. His job is 
to anticipate the needs of the consumer and to have a 
selection of the desired goods in a convenient place at 
the time the consumer wants them. In order to do this 
he must perform several marketing functions, among 
which the more important ones are : selling, storing, buy- 
ing, and dividing. Others are risking, financing, trans- 
porting, packing, managing, and recording. 1 

Today we think of selling as one of the chief functions 
of the retailer. He displays his goods in his windows 
and in his store to attract buyers. He advertises them 
in the papers. He employs salesmen to show and ex- 
plain the goods to customers. 

The retailer stores the goods in locations convenient 
to his customers. The places where the retailers con- 
duct their businesses are usually called stores, which may 
indicate the historical importance of the storage func- 
tion. 

The retailer must buy goods. It is sometimes said that 
he is the purchasing agent for his community. He must 
find out what his customers want, negotiate terms of 
purchase, and assume title to the goods. The small re- 
tailers do little to seek out sources of supply; they usu- 



1 The other two, assembling and grading, are minor functions for 
most retailers. 

127 



128 Retailing 

ally select their goods from those offered by the whole- 
salers. Buying is relatively more important with the 
wholesaler while selling is relatively more important 
with the retailer. Large retailers often seek out sources 
of supply, but in so doing they are really performing a 
wholesale function. 

The retailer must divide the goods into the quantities 
desired by his customers. The word retailer is said to be 
derived from a word meaning "to cut again/' that is, to 
divide. The retailer weighs and measures goods that 
come in bulk and unpacks goods that come in cases, so 
that they may be sold by the package. 

Risk is involved in carrying goods in stock and in sell- 
ing on credit. The retailer not only must finance his 
stock of goods but often extends credit to the buyers. 
He in turn, however, often receives liberal credit from 
the wholesalers, thus reducing the amount of capital 
necessary to conduct his business. The wholesaler often 
delivers the goods to the retail store; in other cases the 
retailer has them delivered by railroads or truckmen. 
The retailer often delivers the goods to his customers, 
usually packing (or wrapping) them. Records should 
be kept of purchases, expenses, and sales, and the busi- 
ness must be managed. 

Volume of retail business. The retail stores of the 
country made sales totaling 49 billion dollars in 1929 and 
25 billion dollars in 1933. The year 1929 was a year 
of prosperity, whereas 1933 was a year of severe depres- 
sion. Retail business was somewhat above the average 
or "normal" in 1929 and considerably below the average 
in 1933, the decline in sales being 24 billion dollars. Of 
this amount approximately two-thirds was due to a de- 
cline in prices and about one-third to a decline in the 
quantity of goods sold. The sales of stores selling perish- 



Retailing 129 

able necessities decreased least. In this group were 
variety stores, 2 automobile repair shops, and retailers 
selling foods, gasoline, drugs, and coal. Most of the de- 
cline was in the sales of stores selling durable goods, 
such as automobiles, building materials, radios, furniture, 
and jewelry. Figures covering the two years are shown 
in Table 7. 

TABLE 7. BUSINESS OF RETAIL STORES IN 1929 AND 1933 

Per Cent 
1929 1933 Decline 

Number of stores 1,543,158 1,526,119 0.5 

Total sales (in thousands) $49,114,653 $25,037,225 -^9 

Total number workers 5,913,547 5,008,093 15 

Average salary per full time 

employee $1,312 $986 25 

Per cent of sales made on 

credit 34 28 

Expense of doing business, 
per cent of sales* 24.8 29.4 

* Includes imputed wage for proprietors at rate paid employees. 

The total volume of sales made by retail stores is not 
the same as the total quantity of goods sold at retail. 
Eetailers make some sales at wholesale, and wholesalers 
make some sales at retail. Some retailers also receive 
money for such services as repairing and storing mer- 
chandise. Many producers, such as publishers, manu- 
facturers, miners, and farmers, sell direct to the 
consumers. We may estimate that the total volume of 
goods sold at retail amounted to more than 52 billion 
dollars in 1929 and more than 27 billion dollars in 1933. 8 



2 The sales of variety stores, commonly called "five and ten cent 
stores," decreased less than the average, presumably because people 
economized by buying cheaper goods, and because lower prices brought 
a greater variety of goods within the price range of these stores. 

3 Retail sales made by wholesalers amounted to 586 million dollars 
in 1933, while wholesale sales by retailers were 462 million dollars. 
Sales of services by retailers were 568 million dollars in this year. Di- 



130 Retailing 

The volume of retail sales has been increasing since 
1933. 

Sales on credit totaled 17 billion dollars in 1929 and 
7 billion dollars in 1933. One-half of the stores extend 
credit, and about one-half of their sales are made on 
credit and one-half for cash. 

Types of retailers. There are many types of retailers: 
the corner grocer, the huge department store, the mail- 
order house, the news stand, the filling station, the coal 
yard, the milk distributor, the restaurant, and the re- 
freshment stand are all retailers. Retailers may be 
classified in many ways, the most usual grouping being 
according to the type of goods sold. The number of 
stores, with their total sales and expenses for the more 
important types of goods, is shown in Table 8. 

Food is easily the most important commodity sold by 
retailers, accounting for fully one-third of the total sales 
in 1933. In addition to that sold in food stores, large 
quantities of food are sold by country general stores, drug 
stores, department stores, and variety stores. The sale 
of automobiles, gasoline, oil, tires, accessories, and re- 
pairs is second in importance, accounting for more than 
one-sixth of the total sales in 1933. The proportion is 
larger in prosperous years. Clothing is sold not only by 

rect sales made to consumers by farmers, publishers, manufacturers, 
and coal mines must run into the billions. The Census missed sales 
of illegal products and sales by retailers who were out of business 
when the Census was taken. It covers only sales made by concerns 
with established places of business, and hence apparently missed the 
sales made by many house-to-house salesmen, farmers, roadside stands, 
and newsboys. 

All goods sold at retail are not consumption goods. Industrial 
goods sold by retailers include motor trucks, gasoline and oil for 
business vehicles, and automobiles used for business purposes; farm 
equipment; office supplies; and artisan's tools. 

The Census figures include meals sold by restaurants and hotels 
but not by boarding houses, clubs, labor camps, and so forth. 



Retailing 



131 



TABLE 8. SALES OF VARIOUS TYPES OF RETAIL STORES, 1933 

Vol. of Sales Per Cent oj 

No. of Stores (thousands) Total Sales 

163,538 $1,803,242 7.2 

140,372 3,201,042 12.8 

38,344 491,866 2.0 

170,434 1,324,387 5.3 

29,901 105,551 0.4 

121,662 1,296,860 5.1 

674,251 8,222,948 32.8 

30,646 2,127,720 8.5 

170,404 1,531,724 6.1 

86,454 519,827 2.1 

17,899 239,978 1.0 

305,403 4,419,249 17.7 

86,548 1,923,333 7.7 

85,839 1,097,437 4.4 

34,122 668,145 2.7 

3,544 2,544,960 10.2 

12,046 678,167 2.7 

135,551 4,988,709 20.0 

42,976 958,780 3.8 

43,296 854,219 3.4 

54,446 951,830 3.8 

23,875 623,077 2.5 

58,407 1,066,252 4.2 

20,869 105,275 0.4 

80,497 923,553 3.7 

1,526,119 $25,037,225 100.0 



Type of Store 

Food: 

Grocery 

Grocery and meat 

Meat 

Restaurants 

Drinking places 

Other 

Total 

Automotive : 

Vehicle dealers 

Filling stations 

Repair garages and shops . 

Accessories and other .... 

Total 

Apparel / 

General : 

Country general 

Gen. mdse and dry goods . 

Department 

Variety (5# to $1) 

Total 

Furniture and furnishings . . . 
Building materials . . 
Hardware, farm implements, 

and supplies 

Coal, wood, and ice 

Drug 

Second hand 

Other 



ALL. 



apparel stores but by department, dry goods, general, 
and variety stores. One-sixth of the sales of retail stores 
in 1933 consisted of various kinds of clothing. Clothing 
apparently took more of the consumer's dollar than 
automobiles, since a considerable part of the trucks, 
automobiles, and gasoline are used for business purposes 
and not for personal consumption. Other important 
types of goods sold at retail are furniture and home fur- 
nishings; building materials; farm equipment and sup- 



132 



Retailing 



plies; hardware; coal; ice; drugs; tobacco; and jewelry. 
Basis of operation. Retail stores are often classified 
according to ownership or method of operation. Inde- 
pendent stores usually consist of single stores operated 
by their owners. Chains consist of several stores under 
one ownership and management. Direct sellers are those 
who send salesmen from house to house rather than have 
the consumers come to their places of business; mail- 
order houses solicit business by mail. Commissaries are 
stores operated by industrial companies, such as mines, 
mills, or factories, primarily to sell goods to their em- 
ployees. Many public utilities, such as gas and electric 
companies, operate stores primarily to promote the sale 
of gas and electricity by the sale of appliances using 
these products. The number of such stores and their 
sales, for 1929 and 1933, are shown in Table 9. It will 
be seen that the chains and direct sellers increased their 
proportion of the business between 1929 and 1933. In 
the case of direct sellers, the increase may have been due 

TABLE 9. SALES OF RETAIL STORES OPERATED IN 
DIFFERENT WAYS 



Type of 
Organization 


Number of Stores 


SALES 


1929 


1933 


Volume 
(millions) 


%of 
Total 


Volume 
(millions) 


%of 
Total 


1929 


1933 


Independents . 
Chains . . 
Direct selling . 
Mail order .... 
Commissaries . 
Public utility 
stores 


1,375,509 
148,037 
1,661 
271 
1,347 

4,053 
12,280 


1,349,337 
141,603 
7,026 
311 
2,719 

4,127 
20,996 


$38,082 
9,835 
94 
515 
116 

163 
310 


77.5 
20.0 
0.2 
1.0 
0.3 

0.3 
0.7 


$17,827 
6,313 
187 
244 
96 

76 
294 


71.2 
25.2 
0.7 
1.0 
0.4 

0.3 
1.2 


Other types. . . 



Retailing 133 

to a more complete coverage by the Census in the latter 
year. 

Location. Stores may be grouped for study on the 
basis of location, for stores in different types of locations 
have certain problems in common. The more important 
types of locations are: rural stores, located at country 
crossroads, in villages, and in small towns; trading center 
stores, located in the county seats and smaller cities scat- 
tered throughout the country; shopping center stores, 
located in the shopping districts of the larger cities; 
neighborhood stores, situated in the smaller business dis- 
tricts and residential areas of cities; and suburban stores, 
operating in suburban towns adjacent to larger cities. 

Integrated and non-integrated stores. Integrated 
stores are those which perform both the wholesale and 
the retail functions. Large stores, such as department, 
chain, and the larger specialty stores, are often large 
enough to buy from manufacturers direct and perform 
the wholesale functions of buying, storing, and financing 
in addition to their retail functions. 

Basis of study. The next chapter will be devoted to a 
study of independent stores, which will be classified on 
the basis of their location. Following this we shall take 
up department stores, mail-order houses, chain stores, 
and the efforts of the independent stores to compete with 
the large integrated stores. 

Expenses. The average expenses of all retail stores 
was reported by the Census as 24.8 per cent of sales in 
1929 and 29.4 per cent of sales in 1933. The higher ex- 
pense ratio in 1933 was caused by the fact that during 
periods of depression and falling prices sales decline faster 
than expenses. Sales fell off 49 per cent during these 
four years, while payroll declined 42 per cent, owing to a 
reduction in the number of employees and wages paid, 



134 Retailing 

and other expenses declined 31 per cent. It is usually 
true in periods of changing prices that the prices of 
commodities change more rapidly than wages, rents, and 
the rates for advertising, electricity, gas, water, tele- 
phones, and transportation. Such items make up most of 
the dealer's expenses. Thus in periods of rising prices, 
the dealer's percentage of expense usually declines, while 
in periods of falling prices his expense percentage usually 
rises. When the volume of sales changes quickly, owing 
to a change in purchasing power, there is a similar lag in 
expenses. The dealer's profits usually increase during a 
period of rising prices and decrease during a period of 
falling prices. The expenses of retailers were abnormally 
high in 1933. 

Reasons for variations in expenses. The expenses of 
individual retail stores vary with the efficiency with 
which they are operated. Average expenses vary with 
the location and the type of goods handled. The ex- 
penses of retail stores (as measured in percentages) in- 
crease with the size of the towns in which the stores are 
located. This increase is due to higher wages and to 
higher percentage costs for rent, advertising, and de- 
livery in the larger towns. 

Average expenses vary with the type of goods sold, 
owing to the shopping habits of the consumers; the value 
of the units in which goods are sold; the regularity of 
sales; and the locations of the stores. The expenses of 
country general stores are low largely because of their 
location. The expenses of grocery stores are low because 
people do little shopping around for groceries, and when 
they enter a store, they usually make a purchase; be- 
cause grocery stores have fairly regular sales throughout 
the year; and because many of them are located in small 
towns and residential districts. Automobile dealers have 



Retailing 135 

fairly low expenses because of the large units in which 
their products are sold. Clothing stores sell in mod- 
erately large units but have fairly high expense owing to 
their irregular sales and to the shopping habits of the 
buyers; the salesmen must show goods to many people 
who do not buy. Jewelry stores have high expenses be- 
cause of irregular sales, shopping habits, and expensive 
locations. A very large part of the jewelry is sold in 
December for Christmas gifts. Furniture stores sell in 
large units but have irregular sales, and the consumers 

TABLE 10. EXPENSES OF OPERATING RETAIL STORES 

Operating Expenses* 

Type of Store (Percentages of Sale^ 

1929 1933 

Grocery 17.4 20.0 

Grocery and meat 16.1 19.9 

Meat 19.6 27.5 

Milk and dairy products 37.4 39.7 

Restaurants 40.0 44.9 

Country general 13.6 17.0 

Variety 25.0 28.9 

Dry goods and gen. mdse 22.5 26.1 

\utomobile dealers 17.8 21.2 

Filling stations 23.8 27.4 

hardware 22.8 29.2 

Tobacco 31.4 27.6 

Department 28.4 32.7 

Women's clothing 29.1 32.1 

Wen's clothing 28.9 34.3 

Shoes 29.4 32.4 

Drug 27.1 30.9 

Lumber 21.8 31.0 

Uoal and ice 24.8 30.8 

Furniture 31.1 40.7 

Fewelry 35.5 47.9 

AVERAGE ALL TYPES 24.8 29.4 

*Includes salaries for the owners active in the busi- 
less at the average rate paid to full-time employees, 
n 1933 for stores with sales under $10,000, salaries for 
woprietors were included as those for full-time em- 
ployees only in the proportion that actual sales bore 
,o $10,000. Thus, if sales were $5,000 only, one-half 
>f the average salary was included for the proprietor. 



136 Retailing 

shop extensively. The drug store has fairly high ex- 
penses, owing to small average sales and often to down- 
town locations. 

The expenses of various types of stores are shown in 
Table 10. The average expense figures cover stores lo- 

TABLE 11. RELATION OF RETAIL EXPENSES 

TO SIZE OF TOWN 

(Illinois, 1929) 

Town Size Average Expenses 

(Percentage 
of Sales) 

Under 10,000 20.8 

10,000- 30,000 24.4 

30,000-100,000 25.5 

30,000-100,000 (suburban) 26.8 

Chicago (3,376,438) 29.3 

TABLE 12. EXPENSES OF RETAIL CLOTHING STORES 
ACCORDING TO SIZE OF TOWN* 

Town Size Number of Average Expenses 

Stores (Percentage 
of Saks) 

Under 10,000 471 18.0 

10,000- 20,000 141 20.8 

20,000- 40,000 139 21.9 

40,000-120,000 136 24.5 

120,000-200,000 44 26.3 

200,000-440,000 34 , 24.3 

440,000 and over 30 31.5 

TOTAL AND AVERAGE 995 22.7 

*Figures from Northwestern University Bureau of Business 
Research for the years 1914, 1918, and 1919 combined. 

TABLE 13. EXPENSES OF RETAIL HARDWARE STORES WITH 

SALES OF $25,000 TO $40,000, ACCORDING TO 

SIZE OF TOWN, 1934. 

Population of Percentage of 

Town Expense 

Under 1,000 22.4 

1,000- 3,500 24.5 

3,500-10,000 27.4 

10,000-50,000 29.0 

50,000 and over 31.6 



Retailing 137 

cated in all sizes of towns. Various types of stores in 
small towns have expenses which are usually 2 to 4 per 
cent lower than the average for the entire country, while 
those in large cities will have expenses which are 1 to 4 
per cent above the average. (Coal ahd ice dealers fur- 
nish an exception to this statement.) This difference 
means that the city stores must charge higher prices, or 
they must buy their goods more cheaply if they are to 
sell as cheaply as the country stores. 

Size of stores. Retailing has been traditionally a 
small-scale industry. Most retail stores have been small 
and have been operated by their owners with only the 
assistance of members of their families or a few hired 
employees. Improvement in transportation facilities and 
in the art of management has, however, made possible 
the growth of large stores. Improved railroad and mail 
facilities have made possible the development of large 
stores selling over wide areas by mail. The growth of 
large cities and the development of street car, subway, 
and suburban train service have produced large depart- 
ment and specialty stores in the shopping districts. 
More recently, chains have grown rapidly by operating a 
number of stores in locations convenient to the con- 
sumers. Large stores have increased in size until stores 
with sales of over $1,000,000 do 10 per cent of the total 
business and stores with sales of over $100,000 do about 
one-fourth of the total business. If chains are included 
as large stores, then large stores may be said to do more 
than one-third of the total retail business. 

In 1933, nearly two-thirds of the retail stores of the 
country had sales of less than $10,000. These stores, 
however, did only 14 per cent of the total business. Poor 
business and low prices in 1933, however, reduced the 
sales volume of most stores so that the number of stores 



138 Retailing 

with small sales was greatly increased. For this reason 
1933 conditions can scarcely be taken as normal. The 
number of stores of various sizes, together with their 
sales, are shown for 1929 in Table 14. - 1 

TABLE 14. NUMBER AND SALES OF RETAIL STORES 
ACCORDING TO SIZE, 1929* 

Number of % of Total Sales Volume % of Total 

Stores Number Sales 

419,378 27.2 Under $5,000 2.0 

254,308 16.5 $5,000- 10,000 3.7 

312,865 20.3 10,000- 19,999 9.0 

173,458 11.2 20,000- 29,999 8.6 

176,767 11.4 30,000- 49,999 13.7 

128,869 8.4 50,000- 99,999 17.8 

49,497 3.2 100,000- 199,999 13.7 

12,966 0.8 200,000- 299,999 6.4 

8,467 .... 0.6 300,000- 499,999 6.5 

4,524 0.3 500,000- 999,999 6.3 

2,059 0.1 1,000,000 and more 12.3 

1,543,158. 100.0 100.0 

* Each store in a chain considered as a separate store. 

Operation of very small stores. A store with sales of 
$5,000 a year has sales of only $16 a day. 4 A lunch stand 
with a margin of 40 per cent has a daily average margin 
of $6.40, while a grocery with a 20 per cent margin has 
only $3.20 per day out of which to pay expenses and 
profits. Out of this margin the retailer must pay for 
rent, fuel, light, wrapping materials, taxes and licenses, 
advertising, delivery, and interest, and he must also take 
his own wages. Some of these small retailers may do 
little or no advertising, borrow no money, and make no 
deliveries. Even when this is the case, their margin 
leaves very little for their own time after they pay other 
expenses. It has generally been supposed that one man 



4 In 1933 in many states more than one-third of the stores had less 
than this volume of sales. 



Retailing 



139 



should sell at least $10,000 worth of goods per year in a 
retail store. The sales vary according to types of mer- 
chandise and the price level. In 1929, two out of every 
five retail stores had sales of less than $10,000. and one 




Courtesy The Red Barrel. 

Fig. 10. The wife helps run the store. In stores with sales of 
less than $10,000 a year, members of the family often do much of 
the selling in conjunction with other work. Something like one-half 
of the retail stores have sales of less than $10,000. 

of every four stores had sales of less than $5,000. If 
$10,000 is the minimum sales volume for an efficient use 
of the time of one man, we may infer that all of these 
small stores are inefficient and should be put out of busi- 
ness. 5 This conclusion does not necessarily follow. Some 



5 The average sales per full-time employee in all types of retail 
stores were approximately $9,000 in 1929 and $5,600 in 1933. The 
average is reduced by the inclusion of restaurants and other establish- 
ments using labor in preparing or repairing goods. Averages for various 
types of stores are shown in Chapter 22. The figure of $10,000 
given as the average minimum amount of goods that a man should 
sell in most types of retail stores is based on prices prevailing between 
1915 and 1931. If prices remain substantially below those prevailing 
during this period, the figure will have to be changed. 



140 Retailing 

of these small stores are so located that they are a real 
convenience to their customers, as, for example, a coun- 
try filling station, a village drug store, or a lobby news 
stand. Some are operated by persons who perform other 
services in addition to selling goods, such as cooking 
foods, repairing watches, tires, clothing, automobiles, 
electrical appliances, and shoes, and plumbing; and some 
make hats or clothing. Many of these small stores are 
conducted in homes and much of the selling is done by 
the wife or children while the husband is at other work. 
Many are operated by people who would otherwise be 
unemployed. Some are operated by people too old to 
hold strenuous jobs. In fact, a great many of the small 
stores are started by people who are out of work and 
have nothing else to do. Such people seldom have train- 
ing or experience that fits them for retail business. How- 
ever, if these people cannot be given other work, it may 
be better to have them engaged in retailing than to be 
on public relief or charity. 

Many small stores are inefficient and should be closed 
if retailing is to be conducted more efficiently. We hear 
many demands that the cost of distributing goods be 
reduced. Large organizations, such as chain stores, often 
reduce distribution costs through integration, large-scale 
buying, and efficiency of operation. On the other hand, 
we hear many demands that the growth of large retail 
organizations be stopped in order to protect the small 
dealers and to give our young men an opportunity to 
establish their own businesses. Some states have im- 
posed high taxes on chain stores to restrict their growth. 
Here is a definite conflict of opinion. Should large or- 
ganizations that are able to sell goods somewhat more 
cheaply be handicapped in order to allow men with small 
capital and limited training to operate stores? There is 
much to say on each side of the question. 



Retailing 141 

Chapter 8 

Review Questions 

1. What are the principal retail functions? 

2. Name the less important retail functions. 

3. Which is more important in retailing, buying or sell- 
ing? Why? 

4. What was the volume of business done by our retail 
stores in 1929? 1933? 

5. What is the difference between volume of sales of retail 
stores and total volume of goods sold at retail? 

6. What is the relative importance of each of the following 
items in our retail trade: clothing; automobiles; building 
materials and supplies; household furniture and furnishings; 
food? 

7. What are the principal types of retail stores? What 
can you say of the relative importance of stores operated on 
different bases? 

8. Why did expenses of retailers increase between 1929 
and 1933? 

9. Are retail expenses higher in large cities or small towns? 
Why? 

10. Why do the expenses of different types of stores vary? 

11. Why has retailing been a small-scale industry? 

12. How do you explain the growth of large retail stores 
in the United States? 

13. How do you explain the existence of so many small 
retail stores? 

Thought Problems 

1. What were the per capita retail sales in 1929 and 1933? 

2. The Census figures show a lower per capita retail busi- 
ness in the rural districts (and states) than in the large cities. 



142 Retailing 

Does this mean that the rural population has a lower stand- 
ard of living? 

3. The Census figures show that many of the smaller 
cities have a higher per capita retail business than the large 
cities. Does this mean that the smaller cities enjoy a higher 
standard of living? What other explanations can you offer? 

4. The Census figures show that the college and university 
towns often have a high per capita retail trade. Why? 

5. Assuming that large stores can sell goods somewhat 
more cheaply than small stores, should large stores be ham- 
pered by high taxes and other forms of restrictive legislation? 



CHAPTER 9 

Independent Stores 

The independent store. Most independent stores are 
small non-integrated concerns that perform only the re- 
tail functions and buy their goods from wholesalers and 
from integrated manufacturers who perform the whole- 
sale functions. The small general and specialty stores 
are the typical non-integrated retailers. They are called 
independent, unit, and individual stores. 

The independent store is usually a small store owned 
and operated by a proprietor or by two or three partners. 
Independent stores may be classified according to their 
location or according to the type of goods handled. We 
are, perhaps, most accustomed to think of stores accord- 
ing to the class of goods handled; for example, grocery 
stores, drug stores, hardware stores, clothing stores, and 
so forth. For our purposes, however, location appears to 
offer a more logical and practical classification and will 
be used in this chapter. 

Common problems of small stores. Regardless of 
their location, the independent stores have many prob- 
lems in common. They have small buying power, which 
means that they must sometimes pay more for their mer- 
chandise than the large stores. On the other hand, they 
do not incur the expenses of operating wholesale depart- 
ments. 

The independent retailer ordinarily has a location more 
convenient to his customers than his large competitors. 
The crossroads, village, small town, and neighborhood 

143 



144 Independent Stores 

city stores are closer to the consumers than are most other 
stores. The small down-town stores are usually located 
on the street levels where the merchandise can be easily 
reached by passers-by. Such stores may be on corners, 
near railway stations, in office buildings, or in other 
places where they are convenient to the consumers. 

The independent merchant usually has a closer per- 
sonal contact with his customers than do the large stores. 
The rural merchant knows his customers intimately and 
calls them by name. The neighborhood merchant in the 
city likewise knows many of his customers and is familiar 
with their wants. 

The independent store is ordinarily too small to em- 
ploy specialists or experts to handle its buying, window 
display, stock display, lighting, advertising, accounting, 
credit extension, collecting, and training of employees. 
The owner must ordinarily look after all of these mat- 
ters, and frequently they are not as well done as in a 
large store that can employ a staff of specialists to look 
after different parts of the business. For example, the 
small store usually has a higher percentage of bad debt 
losses on credit sales than the large store that employs a 
credit manager. 

The small store does not usually have as detailed a 
system of accounting and stockkeeping as the large store. 
This proves to be a handicap in analysing its operations 
and in selecting its purchases. On the other hand, it does 
not have the cost of keeping elaborate records, nor of 
employing a staff of high-priced specialists. 

Rural and city markets. The population and retail 
business of the country is distributed as shown in Table 
15. The Census reported practically no shift in the pro- 
portion of stores and sales in cities of different sizes from 
1929 to 1933. 



Independent Stores 145 

TABLE 15. BUSINESS OF RETAIL STORES BY 
LOCATION, 1933 



Size of Town 


Per Cent 


Per Cent 


Per Cent 


(Population) 


of Total 


of Total 


of Total 




Population 


Stores 


Sales 


Over 500,000.. 


17.0 


19 


26 


100,000-500,000 . 


. . 12.6 


14 


20 


10,000-100,000. 


. . 18.0 


21 


24 


2,500- 10,000. 


8.6 


13 


12 


Under 2,500.. 


43.8 


33 


18 



It will be noted from the figures in the table that towns 
of over 2,500 population do a larger retail business in 
proportion to their population than smaller places. In 
one Census study it was shown that in 61 per cent of the 
counties the county seat towns did over one-half of the 
retail business. The importance of the towns in this 
group as trading centers is indicated by the fact that 80 
per cent of the counties have no town as large as 10,000 
population. Communities under 2,500 include the coun- 
try's farms and do a relatively small retail business in 
proportion to population. This can be explained largely 
by two facts the people in this area go to larger towns 
to do much of their buying, and many of the people liv- 
ing in this area are farmers who raise much of their food 
and fuel. In 1929 there were 694,536 retail stores in 
places of less than 10,000 population, with total sales of 
nearly 15 billion dollars. This number was 45 per cent 
of the total number of stores in the entire country, and 
these stores did 30 per cent of the total retail business. 

Location. The independent stores may be located at 
a country crossroad; in an agricultural, lumbering, or 
mining village; on the main street of a small town; in 
the shopping district of a city; in the residential neigh- 
borhood of a city ; or in a suburban town. 

Rural stores. Rural stores consist of specialty, 
multiple-line, and general stores located in villages and 



146 Independent Stores 

on country roads. Many rural stores handle only one 
line of goods, such as groceries, hardware, building ma- 
terials, or clothing; many handle groceries and a stock of 
miscellaneous (variety) goods. Many handle two or 
more lines of goods, for example: hardware and groceries; 
clothing, dry goods, and hardware; groceries and shoes; 
building materials, coal, and farm equipment. Others 
are general stores in that they handle a great variety of 
goods. Many rural stores attempt to handle all kinds 
of goods to meet the daily needs of their customers. A 
typical general store carries such goods as groceries, 
shoes, work clothing, underwear, hats, hosiery, hardware, 
stoves, seeds, tools, and some of the articles of farm and 
household equipment. 

The Census reported some 100,000 general and mul- 
tiple-line stores in 1929, located in towns of less than 
10,000 population. These stores had sales of about 2 
billion dollars, which was 4 per cent of the total sales 
of all retail stores. Other types of stores that are espe- 
cially important in rural districts are those handling 
feed, farm supplies, farm implements, hardware, lumber, 
and gasoline. 

In addition to selling goods, many rural stores are im- 
portant in assembling such farm products as eggs, poul- 
try, cream, and cotton. Many rural stores do from 
one-fourth to one-half of their total business in assem- 
bling farm products which are shipped to other markets. 

The rural store of today has to meet conditions quite 
different from those prevailing when the country was 
being settled. The United States was settled under a 
geography determined by horse, water, and rail transpor- 
tation. County seats were located every 20 or 30 miles 
so that a man could visit the courthouse and return home 
the same day by horse. The county seats usually de- 



Independent Stores 



147 



veloped into trading centers. Between the county seats 
villages were established every four to eight miles, serv- 
ing as assembling points for farm products and as supply 
depots at which the farmers could buy their convenience 
goods and farm supplies. Some of these grew into trad- 
ing centers. . 




< o/uN.v// i tie Jfrogresaive Urocer. 

Fig. 11. Store front of a modern general store. Note the open 
windows (no backs), the interior of the store being visible from the 
sidewalk. 

For about two decades after the railroads were built, 
the farmers bought their convenience goods and some of 
their shopping goods at the village stores. Other shop- 
ping goods were bought on periodic visits to the county 
seats and on occasional visits to larger cities. Then came 
the mail-order house with its greater variety of goods 
and, in many instances, lower prices. The mail-order 
houses took much business away from the rural stores, 
and forced them to reduce their prices and carry wider 
assortments of goods to hold their trade. After two 
decades of competition between the rural store and the 
mail-order house, the automobile came into general use 
and increased the number of competitors. 



148 Independent Stores 

The use of automobiles and the building of surfaced 
roads have enabled the farmers to visit the larger towns 
more frequently. The stores in these towns have larger 
stocks. Many cash-carry chain stores with low prices 
are found in these towns, and many of the independent 
stores advertise low-priced specials which appeal to the 
farmers. In some parts of the country there has been an 
increase in farm tenancy, while some parts have had a 
decline in rural population; these changes have caused 
a decline in the demand for many kinds of goods. 

Advantages of rural stores. The rural stores have 
several advantages. They are closer to their customers 
than any of their competitors. It takes more gasoline 
for their customers to visit the trading center stores. 
They have low operating expenses. The cost of living, 
the wage scale, and the cost of rent are low in the rural 
districts. Total expenses are often from 13 to 18 per 
cent of sales. 1 The rural stores, likewise, usually have 
little or no cost for delivering goods to the buyers. The 
rural dealer has a personal acquaintanceship with his 
customers, and he often extends credit to them. He 
generally claims to have lower selling prices than the 
stores in the larger towns because of his lower operating 
expenses. 

Disadvantages of the rural stores. The greatest dis- 
advantage of the rural store is its limited variety of 
goods. Travel by automobiles, fashion magazines, mov- 
ing pictures, the radio, and advertisements in the news- 
papers enable the rural population to obtain the latest 
style news. There is less difference in the fashions of 
clothing, household furnishings, and mechanical appli- 



1 It should be remembered that rural stores sell largely convenience 
goods, farm equipment, and feed, which involve lower expenses than 
does the sale of shopping goods. 



Independent Stores 149 

ances between the city and country population than ever 
before. Many rural buyers want the popular styles, and 
if the rural stores do not have these goods, the automobile 
enables them to go to the larger towns for them. The 
rural dealer can partially overcome this handicap by buy- 
ing small quantities of each article and re-ordering fre- 
quently, and by ordering from catalogs when customers 
want articles that are not in stock. 

The larger towns have many attractions, such as 
amusements, legal and medical services, banking facil- 
ities, barber shops and beauty parlors, schools, hospitals, 
and repair shops for different types of goods. When 
people come to a town primarily for such services, they 
often buy goods. 

The rural dealer often lacks a newspaper that is a 
satisfactory advertising medium. To advertise in the 
county seat papers often involves a waste of circulation 
and unnecessary expense. However, if no satisfactory 
local paper is available, the merchant can advertise by 
direct mail or by outdoor signs. A store paper (house 
organ) carrying news of the neighborhood and the goods 
offered for sale can be used effectively. Many rural 
stores, however, fail to advertise consistently. 

Much business is lost by the rural dealers because of 
indifference, dirty stores, poorly displayed goods, too 
liberal extension of credit, failure to collect accounts, and 
poor advertising. These are results of the dealer's in- 
efficiency. Perhaps more sales are lost for these reasons 
than from inherent handicaps in the business. 

Shopping and convenience goods. That farmers usu- 
ally go farther to purchase shopping goods than con- 
venience goods is illustrated by a study made in Illinois 
in 1935. Shopping goods, it will be recalled, are goods 
of relatively large value to the purchase of which the 



150 Independent Stores 

consumers attach considerable importance, while con- 
venience goods are usually smaller staple articles which 
are bought frequently. 

TABLE 16. AVERAGE NUMBER OF MILES TRAVELED BY 

FARMERS TO PURCHASE DIFFERENT TYPES OF GOODS 

(Illinois, 1935) 

SHOPPING GOODS CONVENIENCE AND BULK GOODS 

Commodity M ^ Commodity M ?^ 

Women's dresses & coats . 15 Drugs & toilet articles .... 5 

Furniture 12 Fresh meat 5 

Women's shoes 10 Groceries 5 

House furnishings 9 Hardware 5 

Women's other clothing . 9 Gasoline and oil 4 

Dry goods 8 Feed (largely from local 

Men's shoes 8 elevators) 4 

Men's furnishings 7 Lumber & building 

Men's suits & overcoats 6 materials 3 

Men's work clothing 6 

There is a marked distinction between such shopping 
goods as women's clothing and furniture, on one side, 
and such convenience goods as groceries and feed, on the 
other. On the other hand, men's furnishings and work 
clothing are close to the borderline between shopping 
and convenience goods. 2 

Conclusions on rural stores. The automobile and the 
surfaced road increase the opportunity of the rural dealer, 
for it makes it possible for him lo draw trade from a 
wider radius. 3 Many wide-awake dealers have taken ad- 
vantage of better transportation facilities and low operat- 
ing expenses and increased sales by properly assorted 
and displayed stocks of goods, plus good salesmanship 
and advertising. Some have sales of more than a hun- 
dred thousand dollars a year and a few have been re- 

2 Distances are greater in more sparsely populated areas. 

3 Some rural stores draw trade from neighboring cities by their lower 
prices on manufactured goods and by the sale of fresh country produce. 



Independent Stores 



151 



ported with annual sales of more than a million dollars. 
Such large rural stores are, however, the exception. 
Generally speaking, the business of rural stores has been 
declining. Trade is being concentrated in larger towns, 
especially the county seats. 

Trading center stores. Trading centers are towns 
that draw trade from surrounding territories and are 




Courtesy The Farmer. 
Fig. 12. Retail stores in a trading center. 

large enough to enable their merchants to handle fairly 
complete lines of shopping goods. A trading center may 
vary in size all the way from one or two thousand people 
(perhaps less in some of the more sparsely populated 
districts) up to a city of 100,000 or more population. 

Trading center stores are able to carry more complete 
stocks of goods than the rural stores. The larger stocks 
of goods and the services and amusements available draw 
people to the trading centers. The stores advertise in 



152 Independent Stores 

the local papers, which often cover their entire trade 
territory, and many of the stores use "specials" or "lead- 
ers" that they advertise at low prices. The trading cen- 
ter merchant has an excellent opportunity to make 
acquaintances with his customers and to study their 
needs. Trading center stores draw trade away from the 
rural stores but lose trade to the stores in the larger 
cities. 

The trading center merchant has to pay higher wages 
and higher rent than the rural merchant, and he is lo- 
cated at a greater distance from his rural customers. 
These factors give the rural merchant the advantage in 
many sales. After all is said, it is more convenient to 
buy near home. If the farmer sells his grain, livestock, 
milk, potatoes, or cotton at the nearby village, the trip 
to the trading center is an extra trip. Most trading cen- 
ters are handicapped by limited parking space, especially 
on Saturday evenings. 

Down-town city stores. Independent down-town 
stores are located in the high rent districts. As the 
amount paid for rent usually increases faster than the 
volume of sales, these stores have a higher percentage 
expense for rent than stores located in the smaller towns 
and cities. Very commonly such stores are located on 
the street level and do not use other floors. This means 
that they must pay first floor rent for all of their space. 
The large store, on the other hand, often uses several 
floors for selling and therefore utilizes some lower priced 
space. Some small stores are located on second floors or 
in basements, but in such cases they may have to do 
a large amount of advertising to secure customers. 

It will be noted from the figures in Table 17 that re- 
tail salaries increased much faster than the sales made 
by each employee. From the small villages to Chicago 



Independent Stores 



153 



TABLE 17. SALARIES AND SALES IN RETAIL STORES 

LOCATED IN TOWNS OF DIFFERENT SIZES 

(Illinois, 1929) 



Size of Town 


Average Salary 


Average Sales 


Average Sales 


(Population) 


Per Full-Time 


Per Full-Time 


Per Store 




Employee 


Employee 




Under 1,000 . . . 


$1,116 


$8,074 


$15,007 


1,000- 3,000 . . . 


1,168 


8,735 


21,717 


3,000- 5,000 . . . 


1,247 


9,431 


27,647 


5,000- 10,000 . .. 


1,335 


9,579 


31,912 


10,000- 30,000 . 


1,309 


9,224 


36,583 


30,000-100,000 (non- 








suburban) ... . 


1,292 


9,028 


43,370 


30,000-100,000 








(suburban) 


1,587 


10,068 


40,786 


Chicago (3,376,438) . 


1,552 


9,598 


48,823 



the average salary increased 39 per cent, while the aver- 
age sales produced by each employee increased only 19 
per cent. Between towns of 5,000 and Chicago, salaries 
increased 20 per cent, while sales per person increased 
only 2 per cent. 

Degree of specialization. The large number of people 
in down-town districts furnishes enough buyers for dif- 
ferent products to make possible a high degree of 
specialization. We find stores handling only one kind of 
goods, such as candy, jewelry, men's hats, luggage, pets, 
oriental goods, periodicals, gift goods, books, tobacco, 
rugs, shoes, women's hats, sporting goods, office supplies, 
and toys. Such stores may also handle only one grade of 
such goods as popular priced candy or expensive hats. 

A high degree of specialization enables such stores to 
carry wider or more complete assortments of goods than 
stores carrying more kinds of merchandise. The shoe 
store catering to only one class of trade may thus carry 
shoes in a variety of materials and styles to fit all shapes 
and sizes of feet. It thus attracts customers who want 
distinctive styles or who have trouble in buying comfort- 



154 



Independent Stores 



able shoes in less specialized stores. A large assortment 
of goods attracts customers who feel that they can find 
exactly what they want, can make selections from large 
stocks, or can obtain distinctive goods. 




Courtexy The Progressive Grocer. 

Fig. 13. Interior of a modern general store. Note the low 
fixtures, the absence of counters, and the display of goods in such 
fashion that they may be easily seen and inspected by the customers, 



All down-town stores do not, however, specialize 
within a narrow field, nor do they all carry complete 
stocks. Some, like the drug stores, attempt to handle 
almost any type of small goods which sell rapidly. Others 
carry only the fast-selling items and try to make a profit 
by a large volume of sales and a rapid rate of stock 
turnover. 

Competitors. The main competitors of the small 
down-town stores are the large department and specialty 
stores located in the shormine? districts and thp. srrmllpr 



Independent Stores 



155 




Court t*i/ The Proffrestive Grocer. 

Fig. 14. Diagram of the interior of a small modern grocery 
store. Note the open displays and the absence of counters. The 
scales and cash register are placed in the rear to draw customers to 
the back of the store so that they will have the opportunity to see 
and buy goods from the open displays. The width of the building 
allows only one display window, which is of the open type. Tables F 
are for special displays goods on special sale or goods which the 
grocer is making a special effort to move. 



156 Independent Stores 

stores located in the suburbs and residential neighbor- 
hoods. 

Advantages. An advantage of the small down-town 
stores in contrast with large down-town stores is their 
greater convenience. The small stores are usually lo- 
cated on the street level and the goods are much more 
accessible than those in the large stores. This is espe- 
cially important with convenience goods such as news- 
papers, magazines, cigarettes, candy, and soda fountain 
drinks and lunches. The ease of entrance is said to be of 
greater importance with men than with women. 

Some of the small stores maintain an exclusive at- 
mosphere which is impossible for the large store patron- 
ized by the masses. The small store also often has a 
more friendly atmosphere than the large store. Many 
people like to be served by the owner of a business, who 
is generally on the floor acting as a salesman, at least 
part of the time. As the other salesmen work under his 
immediate supervision, the small store often has a better 
quality of salesmanship than the larger stores. 

Disadvantages. The small store cannot employ 
expert specialists as can its large competitors. It cannot 
advertise so advantageously, for it cannot afford the large 
space in the city papers and it cannot afford an expert 
advertising manager. It does not have the reputation 
that is often obtained by a large store. Nor is it able to 
offer the consumer all kinds of goods as does the depart- 
ment store. It is handicapped in rendering credit service, 
for it cannot afford a complete credit department. It 
may not be able to buy as cheaply as the large store, and 
it does not usually have specialized buyers to scour the 
world for new and distinctive goods. 

Neighborhood and suburban stores. Neighborhood 
and suburban stores in many ways occupy positions mid- 



Independent Stores 157 

way between the small town stores and city stores in the 
shopping districts. They have higher wage scales than 
the small town stores. They have a closer personal ac- 
quaintanceship with their customers than the down-town 
stores but not as close a touch as the rural stores. They 
are located closer to their customers than the down-town 
stores, but they do not carry the same wide variety of 
goods. They lack many attractions found in the shop- 
ping districts. The large number of stores, the variety 
of goods, the brilliant show windows, the theaters, the 
restaurants, and the crowds are attractive to many and 
draw people to down-town stores when they could obtain 
the goods at the same or lower prices at stores near their 
homes. The neighborhood and suburban stores thus 
have the same complaint against the down-town stores 
as do the rural stores against the stores located in the 
trading centers. 

Automobile trade. One distinct advantage of the 
neighborhood stores is the greater ease of parking in 
nearby streets. Traffic congestion and limited parking 
space keep many people away from down-town stores 
and help the suburban stores. Many of the large down- 
town stores have opened branch stores in the suburbs, 
perhaps realizing that it is difficult to draw any more 
trade into the congested down-town districts. 

Special types of stores have also grown up to sell to 
the motorists. Among these are roadside stands, street- 
side markets, drive-in markets, groups of stores built 
around a parking space into which customers may drive 
and park, and large food markets located outside busi- 
ness districts. The thousands of roadside stands along 
our automobile highways sell gasoline, oil, tires, meals, 
sandwiches, candy, drinks, groceries, novelties, drug 
sundries, and antiques. 



158 Independent Stores 

Vending machines. There are thousands of machines 
throughout the country selling various kinds of articles 
from chewing gum, candy bars, and cigarettes to gaso- 
line, spark plugs, and handkerchiefs. When properly 
placed, such machines may be a convenience to the con- 
sumers and a source of profit to their operators. 

Self-service stores. Many stores handling staple mer- 
chandise place the goods on open shelves and tables and 
allow the customers to select their own goods. This 
method eliminates salesmen and saves their salaries. 
The self-service method is used by both independent 
and chain stores. This method is popular with many 
people who like to select their own goods, entirely free 
from any pressure from salesmen. 

The principal advantage of the self-service method is 
that it saves sales force expense, which often amounts 
to from 5 to 8 per cent of sales. In the place of sales- 
men, however, stockmen, checkers, and cashiers are 
required. The number of persons required is, however, 
much less, so that a net saving is realized. 

The self-service method also enables the dealer to 
increase the volume of business done in a given building. 
This results in reducing the percentage cost of rent. 
In the sale of foods it is estimated that successful service 
stores have expenses of 16 to 20 per cent, cash-carry 
stores of 12 to 17 per cent, and cash-carry self-service 
stores of 8 to 14 per cent. The expenses of chains may 
be slightly less in some instances. 

Self-service stores have several limitations. In the 
first place, they are adapted only to the sale of more or 
less staple merchandise, and usually to packaged mer- 
chandise. They are not adapted to the sale of fresh 
meats or to the sale of wearing apparel where the 
customer needs the advice and assistance of the salesman. 



Independent Stores 159 

The self-service method involves no saving to the 
small store. It usually requires two people to operate 
a self-service store. The small neighborhood store oper- 
ating with one or two people would not reduce it labor 
expenses by changing to the self-service method, unless 
such a change increased its sales. Some self-service 
stores have relatively large losses from theft, and some 
employ watchers to guard against thievery. 

Chapter 9 

Review Questions 

1. What is meant by an independent store? 

2. What are the more important problems of the small 
store? 

3. Is the trade of rural stores increasing or decreasing? 
Why? 

4. What are the competive advantages of the rural store? 

5. What are the competitive disadvantages of the rural 
store? 

6. What can you say of the opportunities of the rural 
merchant? 

7. What is meant by a trading center? 

8. What attracts customers to a trading center? 

9. What are the advantages of trading center stores con- 
trasted with rural stores? 

10. What are the advantages of trading center stores as 
contrasted with stores in large cities? 

11. What are the disadvantages of trading center stores 
contrasted with rural stores? With stores in large cities? 

12. What types of goods are handled by down-town inde- 
pendent stores? 

13. Who are the chief competitors of the small down-town 
stores? 



160 Independent Stores 

14. What are the advantages of the small down-town stores 
as contrasted with the neighborhood stores? With the large 
down-town stores? 

15. What are the disadvantages of the small down-town 
stores as contrasted with the neighborhood stores? With the 
small town stores? With the large down-town stores? 

16. What are the advantages of neighborhood stores? 

17. What are the disadvantages of neighborhood stores? 

18. What effect is the automobile having on neighborhood 
and suburban stores? 

19. What can you say of roadside and streetside selling? 

20. What are self-service stores? Do consumers like them? 

21. What are the advantages and limitations of self-service 
stores? 

Thought Problems 

1. What do you think of the future of retailing in the 
small villages of the country? 

2. Some individual stores handle only one kind of goods, 
for example, one brand of candy. Other so-called "specialty" 
stores, like the drug store and the hardware store, handle a 
great variety of goods. The present tendency is said to be 
toward handling more and more different articles. The argu- 
ments are that a greater variety of goods helps to serve the 
consumers and that additional lines can be handled without 
proportionately increasing expenses for rent, wages, and light. 
On the other hand, it is argued that carrying a wide variety 
of goods means that stocks are limited and incomplete; that 
many colors, sizes, or styles are not stocked; that many goods 
become soiled and obsolete before they are sold; and that 
the store tends to become a "junk shop." 

Evaluate these arguments. How can a merchant determine 
whether he should add additional lines to his stock or cut 
out some of his present lines and specialize on a smaller 
number of lines? 



Independent Stores 161 

3. It has been said that the volume of retail hardware 
business has been declining. One explanation is that the 
hardware merchants have interpreted the term "hardware" 
too narrowly that they have not added new lines to take the 
places of goods (harness, buggies, and other horse goods, for 
example) that have gone out of use or have declined in im- 
portance. Comment. What lines can the hardware dealers 
add to their stocks to increase their volume of sales? 

4. How do the small stores hold so much of the trade 
as they do when many of them are inefficiently managed? 

5. Zoning ordinances limit the areas in which stores can 
be located. How will zoning affect the number of retail stores? 
Will zoning help or harm the small individual stores? 

6. From the consumers' standpoint, should the small 
neighborhood stores be prohibited? 

7. What do you think of mechanical selling by vending 
machines? 

8. It is said that stores in many trading centers have 
broadened their lines to such an extent that few of them carry 
fully assorted stocks. There is considerable overlapping of 
stocks between stores. For example, several stores in a town 
may carry shoes of the same sizes and at the same prices, 
whereas no store has complete stocks of wide and narrow 
sizes nor of high and low priced shoes. Sporting goods may 
be carried by the hardware stores, department stores, drug 
stores, and book stores, but no store in town may have a 
complete line. Such a condition does not properly serve the 
consumers and is said to drive trade to other towns. 

To remedy such a situation it is suggested that the, mer- 
chants in the town get together and agree on the lines which 
each will carry. For example, one shoe store will carry nar- 
row lasts in both popular and high prices, and the other stores 
will agree not to handle the very narrow lasts. Another store 
may agree to handle the very wide lasts, another arch sup- 
port shoes, and so on. All would handle the popular sizes 
and styles in the popular price lines. This can be done for 
all lines of goods, so that buyers will find that they can get 
practically anything they want in the town. The merchants 



162 Independent Stores 

will secure a reputation of having complete stocks and the 
town will draw more trade from surrounding territories and 
will hold more of its own trade at home. 

Criticize this suggestion. Suggest ways of getting the mer- 
chants to agree to such a proposal. 



CHAPTER 10 
Department Stores and Mail-Order Houses 

Department Stores 

Definition. A department store is a retail store which 
has a departmental organization and which handles a 
variety of goods including women's wearing apparel or 
dry goods. A departmental organization means that 
the different kinds of goods are separated in location 
and management and that records are kept showing the 
sales, purchases, expenses, and profits of each class of 
goods (or department). Most department stores are 
located in the shopping sections of cities and are patron- 
ized largely by women. 

The department store is usually integrated and per- 
forms the retail and many of the wholesale functions. 
Buying is particularly important among the wholesale 
functions, and the stores send their buyers to the large 
markets regularly. The larger stores maintain perma- 
nent buying offices in New York and in other important 
markets such as Paris. Their buyers visit Europe, the 
Near East, and the Orient. The department stores are 
constantly on the lookout for new goods and bargains, 
and often buy job and odd lots at reduced prices. The 
larger stores have stylists who study fashion trends; 
and some of them originate their own designs and ar- 
range with manufacturers to produce the goods. 

The importance of the buying function increases with 
the size of the store. A recent study showed that de- 

163 



B HIII 
I III!! 

(II 




Courtesy Mandel Bros. 

Fig. 15. A large department store. Such buildings contain sales 
rooms, offices, and usually storage space for small goods. Bulky goods, 
like furniture, are often stored outside the shopping districts, and goods 
for delivery may be taken outside for sorting. See Fig. 17 on page 168. 

164 



Department Stores and Mail-Order Houses 165 

partment stores with sales of $1,000,000 to $2,000,000 
had buying expenses of 3 per cent, while those with 
sales of over $10,000,000 had buying expenses of 4.5 
per cent. The larger department store largely eliminates 
the wholesale selling expense, buying only fill-in orders 
from the wholesalers. Smaller department stores buy 
a larger part of their goods from the wholesalers. De- 
partment stores usually have stock rooms in their build- 
ings and often have separate warehouses located outside 
the retail districts. Many goods are delivered by the 
manufacturers as they are needed, so that large stocks 
do not have to be carried. 

Many large down-town specialty stores selling cloth- 
ing, furniture, and household furnishings have a depart- 
mental organization. Such stores will be included in 
the following discussion. 

Importance. The Distribution Census of 1933 reports 
4,221 department stores with sales of over $100,000, in 
1929, and 3,544 such stores in 1933. These stores had 
sales of $4,350,098,000 in 1929 and $2,544,960,000 in 
1933. They did 8.9 per cent of the business done by all 
retail stores in 1929 and 10.2 per cent of the total in 
1933. Department stores make up less than one-third 
of one per cent of all retail stores in the country, yet 
they do approximately 10 per cent of the total business 
done by retail stores. The department stores sell princi- 
pally shopping goods. They are particularly important 
in the sale of women's clothing, household furnishings, 
and furniture. The Sample Census showed that they 
sold more than one-half of all the household furnishings, 
and between one-third and one-half of all the toilet 
articles and women's clothing (excluding shoes) sold in 
the cities studied. They are also relatively important 
in the sale of children's clothing, men's furnishings, au- 



166 Department Stores and Mail-Order Houses 

tomobile tires and accessories, and household, hardware, 
and garden supplies. They are relatively unimportant 
in the sale of groceries, meats, drugs, tobacco, and ice 
cream. In many of such convenience lines they do less 
than five per cent of the total business. 

Organization. A department store usually has four 
major divisions merchandise; finance or control; sales 
promotion or publicity; and store management. 

The merchandise division buys and sells the goods. 
It is divided into departments handling different kinds 
of goods. A large store will have from 50 to 200 mer- 
chandise departments in the charge of buyers, working 
under the supervision of merchandise managers. A 
smaller store will have fewer departments. In some 
stores the buying and selling functions are separated, so 
that the buyers buy the goods and sales managers are 
responsible for their sale. Up to the present, however, 
the buyers in most stores are responsible for both the 
purchase and the sale of the goods in their departments. 

The finance, or control, division is usually under a 
controller who has charge of the accounting, credit, sta- 
tistical, and finance departments. 

The sales promotion, or publicity, manager has charge 
of the store's advertising and window displays and is 
responsible for planning special sales or "promotions." 

The store manager, or superintendent, is in charge of 
the store building and the delivery of goods. He must 
heat, clean, guard, light, and care for the building. He 
is responsible for the personnel department, which hires 
and trains most of the employees. 

The department store has central departments which 
handle the advertising, credit, collections, delivery, and 
accounting, and which hire and train employees. These 
functions are in the hands of specialists who may become 



Department Stores and Mail-Order Houses 167 

expert in the management of their departments. This 
expert supervision may enable the department store to 
perform these operations better than the small store 
which cannot employ experts. 

A woman's store. The department store is patronized 
largely by women. Women are said to spend more time 




Courtesy Abbott, Merkt <& Co. 

Fig. 16. Sorting of packages for delivery by a city depart- 
ment store. 

in shopping than men. They look at more goods and 
compare quality, styles, and prices more carefully. It 
has been said that the typical woman visits three stores 
before buying shopping merchandise. Women trust 
their judgment much more than men, which means 
that brands are of less importance in selling to women 
than to men. 

Men as a rule dislike shopping in department stores 



168 Department Stores and Mail-Order Houses 

unless they have separate men's departments that can 
be easily reached from the street. Men usually prefer 
specialty stores which are conveniently located and in 
which they can make their purchases quickly. Depart- 
ment stores often have large sales in men's furnishings, 




Courtesy Abbott, Merkt <6 Co, 

Fig. 17. Warehouse and remote delivery depot of a city de- 
partment store. Goods arc stored here until they are needed on the 
sales floors. Packages are brought here from the store and are sorted 
for delivery to the customers. 

but the sales are usually made to women. The depart- 
ment stores that have made large sales to men usually 
entirely separate the men's departments from their other 
departments. 

Service. Most department stores emphasize their 
services. They extend credit liberally, give free and 
frequent deliveries of goods, send out goods on approval, 
fill telephone orders, and allow the customers to return 



Department Stores and Mail-Order Houses 169 

goods on almost any excuse. Many department stores 
have free rest and writing rooms, children's play rooms 
or nurseries, and auditoriums or lecture rooms. Many 
of them operate service departments, such as restaurants, 
beauty parlors, and barber shops, at a loss to attract 
customers to their stores. 

Most department stores have adopted the motto "The 
customer is always right." This means that customers 
are allowed to return or exchange goods whenever they 
feel justified in doing so. Margins, expenses, and profits 
of department stores are shown in Tables 18, 19, and 20. 

TABLE 18. MARGINS, EXPENSES, AND PROFITS OF 
DEPARTMENT STORES ACCORDING TO SIZE, 1934f 



Size of Stores 


Margin 


Expense 


PROFIT OR GAIN 


Number oj 


(Annual Sales 


%of 


%of 


%of 


% of In- 


Stores 


Volume) 


Sales* 


Sales 


Sales 


vestment 


Reporting 


Under $150,000. 


. 33.5 


31.2 


2.3 


4.5 


75 


$150,000- 300,000 . 


34.5 


32.2 


2.3 


4.5 


74 


300,000- 500,000 


36.3 


33.9 


2.4 


5.5 


47 


500,000- 750,000 


37.2 


34.0 


3.2 


6.6 


40 


750,000- 1,000,000 


37.0 


35.0 


2.0 


3.0** 


26 


1,000,000- 2,000,000 


37.8 


35.2 


2.6 


4.0 


66 


2,000,000- 4,000,000 . 


38.6 


36.2 


2.4 


4.6 


55 


4,000,000-10,000,000 


39.2 


37.1 


2.1 


4.8 


51 


10,000,000-20,000,000 


40.1 


37.2 


2.9 


5.2 


17 


20,000,000 and over.. 


40.2 


37.2 


3.0 




7 



t Figures from Harvard Bureau of Business Research Bulletin No. 96. 
*Including other income. 
"""Incomplete. 

Competitive advantages of the department store: 
Buying power. The department store is usually a large 
store which buys in large quantities. This frequently 
enables it to secure lower prices than the small specialty 
stores. There is an advertising value in having goods 
sold in the large department stores, for which reason 
manufacturers are often willing to give price concessions 
to induce the larger stores to handle their goods. 



170 Department Stores and Mail-Order Houses 

Convenience of a single store. The ability to make all 
purchases in one store and on one line of credit is an 
advantage to the customers. 

Advertising. The department store can advertise ad- 
vantageously. It usually draws trade from the entire 

TABLE 19. OPERATING STATEMENT FOR 66 DEPARTMENT 
STORES WITH SALES OF $1,000,000-$2,000,000 IN 1934 

Per Cent of Sales 

Net sales 100.0 

Cost of merchandise 65.6 



Gross margin (including "other income") 37.8* 

Expenses: 

Pay roll 17.5 

Real estate (rent, taxes, interest, 

insurance, etc., on buildings) 4.5 

Advertising 3.6 

Taxes (other than real estate) 0.4 

Interest " " " " 2.3 

Insurance " " " " 0.4 

Depreciation " " " 0.9 

Supplies 1.6 

Bad debts 0.4 

Travel and communication 1.0 

Repairs 0.4 

Other 2.2 

Total 35.2 

Net gain (profit) 2.6 

Net gain on investment 4.0 

*Includes "other income." 

TABLE 20. MARGINS, EXPENSES, AND PROFITS OF 

DEPARTMENT STORES, 1930-34 
(74 Stores with Sales over $2,000,000 in 1930) f 

PERCENTAGES OF SALES 

Year Margin* Expense Profit 

or Gain 

1930 37.2 34.2 3.0 

1931 37.4 36.2 1.2 

1932 37.6 39.8 -2.2 (loss) 

1933 . . 40.1 38.2 1.9 
1934 .... 39.7 36.5 3.2 

tFigures from Harvard Bureau of Business Research Bulletin No. 96. 
"Includes "other income." 



Department Stores and Mail-Order Houses 171 

circulation area of the city papers and hence pays for 
very little waste circulation. When a customer is drawn 
to a department store by the advertisement of one ar- 
ticle, she is very apt to purchase other articles. The 
department store is large enough to employ specialists 
to plan and write its advertisements. 

Location. The department store is located in the 
shopping section. This means that it is well located to 
secure the shopping trade, but also that it is in the 
high-rent district. It can partly offset the higher 
cost of this location by using several floors for sales 
purposes. 

Cut-price leaders. It is doubtful if the average prices 
of the department stores are below those of many com- 
peting stores. Department stores, however, make very 
effective use of cut-price leaders. These leaders cause 
many people to feel that they can purchase goods more 
cheaply at department stores than at the small specialty 
stores. 

Competitive disadvantages of the department store. 
The department store has certain serious disadvantages 
or limitations. It usually has high operating expenses 
owing to the cost of management, the cost of rendering 
liberal service, its location in the shopping district, and 
the fact that it performs many of the wholesale func- 
tions. Expenses are usually above 30 per cent and in 
the larger stores often above 35 per cent. The high 
expenses, however, may be partly offset by the saving of 
a part of the wholesaler's margin. Figures given in 
Chapter 21 show that the average sales for employees 
in department stores are relatively low $8,406 per full- 
time employee in 1929. This poor showing appears to 
be due to the large number of people in supervisory 
positions, to the concentration of sales during a short 



172 Department Stores and Mail-Order Houses 

daily period, and to the many services performed for 
their customers. 

The department store usually has an excellent location 
for the shopping trade, but this very fact means that 
its location is poor for the sale of convenience goods. 
Another disadvantage is that the large store lacks per- 
sonal touch and acquaintanceship with its customers. 

Problems of the department store: Management. 
The large department store has many employees, and 
their rate of turnover is often high. This gives them a 
serious problem in hiring and training employees. It 
is the author's observation that department stores often 
have poorer salesmanship than many of the smaller 
stores. They have difficulty in securing a high grade of 
workers. The employees must be trained by other em- 
ployees, and there are so many to train that they are 
often placed on the sales floors with very brief instruc- 
tions. Sometimes they are taught only how to make out 
the necessary records for cash and credit sales before 
being allowed to sell. In such cases poor salesmanship 
is almost sure to result. 

A good deal has been heard in recent years about the 
difficulty of securing efficient managers. As a rule, the 
managers of the major departments receive very nice 
incomes; in the larger stores figures of from $5,000 to 
$25,000 are frequently mentioned, and stories are heard 
of a few much higher incomes. Many of the stores are 
devoting much more attention than formerly to securing 
and training men and women for managerial positions. 
Many stores definitely try to obtain university graduates, 
who are then given special training with the expectation 
that some will develop into efficient managers. 

Success of department stores in the past has depended 
upon the skill of their buyers in buying and selling goods 



Department Stores and Mail-Order Houses 173 

at a profit. Fashion has become so important that many 
argue that the buying and selling functions should be 
separated so that the buyers could devote all of their 
time to the purchase of merchandise. It is argued that 
better results would be obtained on the sales floors if 
they were in the charge of sales managers instead of the 
buyers, who are away much of the time. The buyers, 
however, usually oppose this change, for they do not 
like to give up their authority, and in most stores they 
are still responsible for the sale of their goods. 

Abuse of service. Many customers abuse the services 
offered by department stores, particularly in the return 
of goods. The stores are glad to accept returned goods 
when they have made mistakes and when the goods are 
defective, but many buyers abuse this privilege. Some 
return goods for no reason except that they have changed 
their minds. Some goods are returned after they 
have been out of the store for considerable periods, or 
even after they have been used. In many stores from 
8 to 10 per cent of all goods are returned, and in the 
larger stores returns of over 10 per cent are not unusual. 
Many stores have felt it necessary to conduct special 
campaigns to induce their customers to return fewer 
goods. 

Expense. The expenses of many department stores 
have mounted so high that it has been difficult for them 
to make profits. Executives have tried hard to reduce 
expenses but often with little success. In the larger 
cities, the stores do the bulk of their business in 4 to 5 
hours daily; and on days when the weather is bad few 
shoppers come down town, but the store's expenses go 
on just the same. Certain days of the week and certain 
periods of the year are also dull. The costs of super- 
vision and of rendering services are high. Many stores 



174 Department Stores and Mail-Order Houses 

have been unable to reduce expenses and have succeeded 
in maintaining profits only by increasing their gross 
margins, which means that they either buy their goods 
more cheaply or sell them at higher prices. 

Mail-Order Houses 

Types of mail-order sellers. There are several types 
of mail-order sellers the manufacturer selling to the 
dealer or the industrial consumer, the manufacturer 
selling to the ultimate consumer, the wholesaler selling 
to the retailer, and the retailer selling to the consumer. 
We have in mind in this chapter the manufacturer or 
middleman selling to the ultimate consumer. There are 
both specialty and general mail-order sellers. The spe- 
cialty house sells only one product or a few allied pro- 
ducts, whereas the general line house offers a wide variety 
of merchandise. Sears, Roebuck & Co. and Montgomery 
Ward & Co. have been among the more widely known 
houses of the latter type. They now operate both over- 
the-counter and mail-order stores. 

Some concerns sell exclusively by mail, while others 
sell both by personal salesmen and by mail. Some retail 
stores have mail-order departments. Most sellers re- 
ceive some business by mail, but, to be considered as 
doing a mail-order business, a seller should actively so- 
licit mail orders and should make a large part of his 
sales by mail. 

There are two methods of selling by mail : first, direct- 
mail advertising, by which letters, circulars, catalogues, 
or other printed material is sent to prospective buyers 
by mail; second, by means of advertisements in periodi- 
cals. The mail-order seller may use either or both of 
these methods. 



Department Stores and Mail-Order Houses 175 

Growth of selling by mail. The origin of mail-order 
houses dates back to the 1870's, but their largest growth 
came after 1890. Mail-order selling grew with the de- 
velopment of the railways and the mail service. 

In order to build a permanent business, confidence 
based on honest dealings and satisfaction must be se- 
cured. Some mail-order sellers advertise: "Send no 
money/' "Goods sent on ten days' free trial/ 7 or "Ex- 
amine the goods before you pay." Many give a very 
strong guarantee and allow the customers to return 
goods for any reason and to receive a refund of their 
money plus transportation costs. 

Goods sold. The consumer who wants some article 
that is not in common use in his community may find 
it easier to order from the catalog than to hunt for the 
article locally. Mail-order sellers have often handled 
goods which the rural and small-town stores did not 
carry, such as new goods, late styles, novelties, special- 
ties, fruit trees, shrubbery, pure-bred livestock, and new 
mechanical devices. The fact that mail-order houses 
found their largest market in the rural districts would 
indicate that the variety and type of goods offered was 
one of the main reasons for their growth. 

Low prices. Many mail-order sellers emphasize low 
prices. In many cases the mail-order houses have under- 
sold the local stores, even when transportation charges 
were included. This they were able to do because they 
bought their goods in large quantities on a wholesale 
basis or manufactured them themselves. 

The anger of the rural dealers was aroused by the 
fact that their customers were constantly telling them 
that their prices were higher than those of the mail- 
order houses. The local dealers were forced to reduce 
their prices. In some rural communities the mail-order 



176 Department Stores and Mail-Order Houses 

sellers were said to have obtained as much as 20 and 
even 40 per cent of the retail business. But, taking the 
country as a whole, we find that the local dealers suc- 
ceeded in holding most of the trade. The largest effect 
of the mail-order catalogs was that they forced the 
local dealers to reduce their prices and to handle a 
greater variety of goods. 

Volume of mail-order business. The Census reported 
311 retailers selling largely by mail in 1933, with sales 
of 244 millions of dollars; in 1929 there were 271 mail- 
order houses with sales of 515 million dollars. This 
was 1 per cent of the total retail sales in each year. The 
total volume of mail-order business, however, is larger 
than is indicated by these figures. A very large number 
of manufacturers, other producers, and retailers sell 
large quantities of goods by mail, but unless more than 
one-half of their sales are made by mail, they are not 
classed as mail-order houses by the Census. Ninety per 
cent of the business reported by the Census was done 
by stores handling a variety of merchandise that is, 
by mail-order department stores. 

Average operating expenses of these mail-order re- 
tailers were 23 per cent in 1929 and 28 per cent in 1933. 

Advantages of selling by mail. The principal advan- 
tages of buying by mail are the ability to secure goods 
unobtainable at many local stores; low prices; and the 
ease of ordering by mail. The principal advantages of 
selling by mail are the low cost of goods because of 
large-scale buying or manufacture; low operating ex- 
penses; and freedom from local depressions. 

The large mail-order houses commonly buy direct from 
the manufacturers, thus securing low prices. They often 
take the entire output of factories or a very considerable 
portion of their outputs, and sometimes they secure fac- 



Department Stores and Mail-Order Houses 177 

tories and manufacture their own goods. The small 
specialty mail-order seller may have a relatively small 
volume of sales and yet secure quantity prices, for 
he sells only a few lines. On bulky products the storage 
function may be largely shifted to the manufacturers, 
orders being forwarded to the factories for shipment. 
The mail-order house has heavy advertising expenses, 
but its other expenses may be low. It has no personal 
salesmen, can locate its plant outside the high-rent retail 
sections or on upper floors, can often turn its stock rap- 
idly, frequently extends little credit, and does not have 
to provide expensive fixtures, since the customers do 
not come to its store. The mail-order house often sells 
nationally. It is thus free from local depression that 
may be very serious to local retailers. 

Success or failure in selling by mail depends largely 
upon the response of the consumers to the advertising. 
The mail-order seller spends money for advertising. If 
it draws well, his percentage of expense will be low. 
Successful sellers by mail are reported to have advertising 
expenses of from 5 to 10 per cent. Specialty sellers 
by mail with products carrying large margins may spend 
much more on advertising and still make a profit. 

Suppose a concern sells an article for $10 that carries 
a gross margin of 50%, or $5. Suppose it costs 8^ to 
prepare and mail a piece of advertising matter. The 
concern mails out 10,000 pieces at a cost of $800. A 
1-Va P er cen ^ return (sales) will give 150 sales and a 
total gross margin of $750; this margin is less than the 
advertising cost. Suppose that new advertising copy 
is prepared, or that a different mailing list is secured, 
and 10,000 more pieces are mailed. If this mailing se- 
cures a 2 1 /!) per cent return, 250 sales will be made on 
which the gross margin will be $1,250. After paying the 



178 Department Stores and Mail-Order Houses 

advertising cost, $450 remains to pay other expenses 
and for profit. Thus a 2% per cent return may be 
profitable, while a 1% per cent return is unprofitable. 
On such narrow differences does success or failure de- 
pend. If an exceptionally attractive article is offered, or 
if the advertising is exceptionally good, the returns may 
be so large that the business is highly profitable. On the 
other hand, a very large percentage of the attempts 
to sell by mail prove unprofitable. 

Very commonly the first sale made by mail is made 
at a loss. Profits are made on repeat orders. Some 
people will order by mail and some will not. The mail- 
order seller's job is to find those who will buy by mail. 
When they are found and a mailing list is made up of 
satisfied customers, the percentages of return will be 
much higher than those obtained by sending advertise- 
ments to new prospects. Thus success in selling by 
mail may depend upon having many articles to sell or 
upon selling "repeat" articles which customers buy fre- 
quently. The furniture and farm supply houses have a 
variety of goods to offer their customers, while those 
selling wearing apparel have repeat goods. 

Disadvantages of selling by mail. The lack of per- 
sonal salesmanship and personal contact with the cus- 
tomers is probably the greatest handicap in selling by 
mail. Ordering by mail is impersonal. The consumer 
often wants personal advice or assurance from the sales- 
man. When the mail-order house has told its story in 
its advertising, it is through. It cannot answer questions, 
meet objections, or make an appeal for business on the 
basis of friendship. At times the mail-order house has 
had very excellent advertising, whereas many of the 
local stores have had very poor personal salesmanship. 
This gave the mail-order house some advantage, but 



Department Stores and Mail-Order Houses 179 

personal salesmanship is inherently stronger than ad- 
vertising. 

The buyer cannot examine the goods when ordering 
by mail, and the best that advertising can do is partially 
to overcome this handicap. In standard merchandise 
that is familiar to the buyer, this may make little differ- 
ence. With shopping goods, however, the customer likes 
to see the goods before she buys because color, design, 
fit, and quality of material are important. Even the 
best of colored pictures is a poor substitute for actual 
examination of the goods. 

Since there is a delay in the delivery of goods bought 
by mail, the buyer must anticipate her wants. This can 
often be done, and the regular mail-order buyer gets in 
the habit of doing it. Wants, however, cannot always 
be anticipated. The mail-order house cannot be used 
for fill-in goods or for emergency purchases. If ex- 
changes are necessary, additional delay is involved and 
this takes time not allowed for when the goods were 
ordered. Adjustments likewise cause delay and often 
annoyance. 

The mail-order seller is handicapped in rendering cer- 
tain types of service. He cannot demonstrate his goods 
or tell the buyers how to use them except by printed in- 
structions. He cannot make repairs unless the goods 
are returned or unless he sends a man to the customer, 
which is expensive. He can carry repair parts, but it 
may take the customer longer to order a part by mail 
than to secure it from the local store. 

The mail-order seller does not ordinarily sell highly 
perishable goods, such as fresh meats. He is handi- 
capped to some extent in selling very bulky goods upon 
which the transportation costs are high. Some mail- 
order houses have largely overcome this handicap by 



180 Department Stores and Mail-Order Houses 

establishing a number of regional warehouses to which 
bulky goods are shipped in carlots. 

Decline in mail-order business. According to com- 
mon opinion, the mail-order business has declined rela- 
tively, if not absolutely, during the past few years. In 
many communities, the farmers report that they buy 
less by mail than they did before the automobile came 
into general use. Many rural dealers report that they 
feel mail-order competition less than formerly. Several 
of the larger and better known mail-order houses have 
entered the chain-store business, indicating that they 
see little room for growth in the mail-order field. 

Three reasons are advanced to explain this decline: 
first, the automobile, which permits the rural population 
more easily and more frequently to visit the larger towns 
where the stores carry larger assortments of goods; sec- 
ond, the increase in the amount of direct-mail adver- 
tising matter received by most buyers, which may cause 
each piece to receive less attention ; and third, the fact 
that the local merchants and chain stores have been 
able to meet, or. more nearly to meet, the prices of the 
mail-order houses. 

Chapter 10 
Review Questions 

1. What is a department store? 

2. How do department stores perform the wholesale func- 
tions? 

3. What can you say of the importance of the department 
stores? 

4. Where are most department stores located? 

5. In the sale of what lines of goods are the department 
stores especially important? 



Department Stores and Mail-Order Houses 181 

6. How do you explain the fact that less than one-third 
of one per cent of the country's stores do 10 per cent of the 
total business? 

7. How are department stores organized? What are the 
main divisions? What are the duties of each division? 

8. What advantage does the department store secure from 
its centralized departments operated to serve the entire store? 

9. Contrast the ways in which men and women shop. 

10. Why do the department stores give such liberal serv- 
ice? 

11. What are the main competitive advantages of the de- 
partment store? Which of these apply in competition with 
the chain store? 

12. How does the department store secure an advantage in 
advertising? 

13. How do department stores use cut-price leaders? 

14. What are the competitive disadvantages of the depart- 
ment store? 

15. What are some of the difficult problems facing the de- 
partment stores? 

16. What classes of concerns sell by mail? 

17. In what two ways do mail-order sellers advertise for 
business? 

18. What advantages enabled mail-order sellers to take 
business away from the local stores? 

19. How do mail-order sellers secure the confidence of the 
consumers? 

20. What are the principal advantages in selling by mail? 

21. What determines the success of a mail-order seller? 

22. What are the principal disadvantages of selling by 
mail? 

23. Why has mail-order selling declined? 



182 Department Stores and Mail-Order Houses 

Thought Problems 

1. Does the fact that the department store performs the 
wholesale functions reduce the total marketing cost? 

2. How can a store secure a "feminine atmosphere"? A 
"masculine atmosphere"? How should a store be arranged 
to appeal to women? 

3. Why do department stores have such a low quality of 
salesmanship? Do you believe that they could secure better 
salesmanship? If so, how? If not, why? 

4. The services offered by the department stores are 
abused by some of their customers. This is especially true 
of the return privilege. How may the stores reduce the per- 
centage of goods returned without losing goodwill? 

5. Some have said that the department stores have erred 
in placing so much emphasis on service. Comment. A few 
have been successfully operated on a cash basis. Do you 
believe that more department stores should go on a cash 
basis? Could a department store operate on a carry basis 
and make separate charges for all deliveries? Are the spe- 
cial services, such as writing rooms, lectures on household 
management, and nurseries, profitable to the stores? 

6. It has been said that one trouble with the department 
store is that it has not attracted enough of the higher type 
of employees. It has been said that many ambitious young 
people have thought of work in department stores as "counter 
jumping" with no opportunities for really worth-while posi- 
tions. Department stores have many low-paid employees, 
but, on the other hand, they have many highly paid em- 
ployees. One department store with 5,000 employees had, 
in 1930, 600 people receiving from $3,000 to $50,000 a year; 
300 receiving from $1,500 to $3,000; and 4,100 receiving un- 
der $1,500 (very few under $1,000). 

Many department stores are said to be definitely trying 
to secure more high school and university graduates. Do you 
believe that the securing of more educated people will improve 
the quality of salesmanship and management and lead to more 
efficient operation of stores? 

7. How may a mail-order house secure mailing lists? 



CHAPTER 11 
Chain Stores 

Definition. A chain-store system consists of a group 
of retail stores under one ownership and management, 
with some uniformity in the methods of operating the 
various stores. The Census considers four stores as the 
minimum number which constitutes a chain. Two and 
three stores under a common ownership are referred to 
as two-store and three-store multiples, or two-store and 
three-store independents. 1 

We ordinarily think of the chain store as being an 
integrated concern performing both the wholesale and 
the retail functions, although some of the smaller chains 
are not large enough to do this. 2 The chain has a central 
buying office which purchases goods for its various stores. 
The larger chains operate one or more warehouses from 
which goods are supplied to the stores in the system. 

We also speak of chains of wholesalers, warehouses, 
banks, and theaters, although these are not usually called 
"chain stores." 

Types. Chain stores may be classified as to owner- 
ship, kind of goods handled, location, and method of 
operation. As for ownership, there are retail, wholesale, 
manufacturer's, and public utility chains. The retail 
chain is owned by an organization primarily interested 



1 A distinction is made between a chain-store system and a branch- 
store system. A branch system consists of one large or dominant 
store and one or more small or subsidiary stores which get much of 
their merchandise from the parent store. 

2 It is argued by some that these small chains are not real chains. 

183 



184 



Chain Stores 



in retailing. A wholesale chain is owned by a wholesaler. 
Many wholesalers have entered the chain-store business 
because the number of the independent stores from 
which they drew their customers was reduced by the 
growth of chain stores. If the wholesaler ceases selling 





Trade Channel Trade Channel 

Manufacturer Wholesaler Retailer Through Chain Store 

KEY: M - Manufacturer; W Wholesaler; Rr Retailer ; V Consumer; 
C.W. C/iatn Store Warehouse 

Fig. 18. Chart showing trade channels through manufacturer- 
wholesaler-retailer and through chain store. Note the reduction 
in sales effort and expense in the chain store. 

to independents and operates his wholesale house merely 
as a supply department for the retail stores, he would 
be considered as the operator of a retail chain. A manu- 
facturer's chain is owned and operated by a manufacturer 
for the selling of a part of the goods produced. A public 
utility chain is operated by an electric or gas company, 
usually to sell merchandise which will increase the sale 
of its electricity or gas. 

Chain stores are often classified according to the .type 



Chain Stores 

of goods handled, as groceries, drugs, furniture, radios, 
and so forth. 

With respect to location, chains are classified as local, 
sectional, and national. A local chain is one operating 
in one city and its neighborhood. A sectional chain is 
one operating in one section of the country, as in the 
New England states or on the Pacific Coast. A national 
chain is one operating in several sections of the country. 
The local chains do about one-third and the sectional 
and national chains about two-thirds of the chain-store 
business. 

Chain-store systems operate in different ways. Some 
operate on the cash-carry basis; some give credit and 
delivery service; some use personal salesmen, while some 
operate on the self-service basis; and some operate leased 
departments in other stores. 

Importance. In the United States the chains have 
had most of their growth since 1900, and particularly 
since 1920. They did 21.5 per cent of the total business 
done by all retail stores in 1929 and 25.2 per cent of the 
total in 1933. (See Table 21 on page 187.) This was 
a rapid gain for a four-year period and may have been 
due in part to the depression which caused people to 
economize. The chains operate less than 10 per cent 
of the total number of stores and yet do one-fourth of 
the business. This is explained by the fact that most 
of the very small stores are operated by independents. 
A chain cannot afford to operate a very small store 
because it must pay regular wages to the employees and 
because it also has the expense of supervision. In 1933, 
the average sales of all independent stores was $13,200 
compared with an average of $44,600 for all chain stores. 

There were 5,546 chains operating 141,603 stores in 
the United States in 1933. Chains operating grocery 



186 Chain Stores 

and meat, grocery, variety, department stores, and filling 
stations did the largest volume of business. Variety 
chains (5^f to $1 stores) did 91 per cent of the business 
of all variety stores. It appears that the buying ad- 
vantages of the chains make it difficult for independent 
variety stores to compete with them. Many department, 
hardware, stationery, confectionery, and other types of 
stores, however, sell the same type of goods as those 
sold by the variety chains. Chains selling shoes, gro- 
ceries, and groceries and* meats do more than 40 per cent 
of the total business done by all such retail stores. We 
must not assume, however, that the chains sell over 40 
per cent of all the shoes, for many shoes are sold by in- 
dependent clothing and department stores. The chains 
do more than one-third of the business done by filling 
stations and tobacco stores. These figures are given in 
Table 21. 

The chains have had their largest growth in staple 
merchandise that is adapted to large-scale buying and 
routine selling, such as groceries, gasoline, and variety 
goods. There has also been a considerable growth in the 
sale of wearing apparel sold by department, clothing, 
and shoe chains. These chains have the advantage of 
being able to keep stylists in the central markets at all 
times to watch fashion trends. Their stockkeeping 
methods enable them to limit losses on garments because 
of fashion changes a risk which is often serious with 
independent stores. The chains have had relatively 
little growth in the sale of hardware, farm equipment, 
jewelry, automobiles, and furniture. 

Organization. The chain is usually organized with a 
central office from which goods are purchased and the 
various stores supervised. This central office has buyers 
for the various lines of goods handled; a superintendent 



Chain Stores 



187 




188 Chain Stores 

to operate its stores; and managers in charge of adver- 
tising, real estate, accounting, warehouses, and any 
factories operated. Large chains have supervisors work- 
ing under the superintendent to oversee the store man- 
agers. 

Expenses. The chains buy many of their goods direct 
from manufacturers. Some have factories and manu- 
facture a part of their goods. 3 The expenses of the chains 
cover both retail and wholesale expenses and should 
be compared with the combined expenses of independent 
wholesalers and retailers. 4 The 1933 Census reported 
average expenses of 27.1 for the retail stores of chains, 
and 4.3 per cent for their central offices, or combined 
expenses of 31.4 per cent. This is an average for all 
types of chain stores. A comparison of the expenses of 
wholesalers and retailers with those of chains for eight 
trades is shown in Table 22. We must remember that 
many of the chains operate on a cash-carry basis while 
most of the independents operate on a service basis. A 
Census survey showed that the independents made 38 
per cent of their total sales on credit, while the chains 
made only 19 per cent of their total sales on credit. 

It will be seen from the figures in Table 22 that the 

8 A study made by the Federal Trade Commission shows that the 
chains buy 70 per cent of their goods direct from manufacturers, 7 
per cent from growers and growers' organizations, 7 per cent from 
brokers and commission merchants, and 8 per cent from wholesalers. 
They manufacture 7 per cent of their goods and obtain the other 1 
per cent from various sources. 

4 This is not a perfect comparison since the independent retailers 
buy large quantities of goods direct from manufacturers and since the 
chains buy some goods from wholesalers. The smaller chains buy 
many goods from the wholesalers, and the larger chains patronize 
wholesalers for perishable products and "fill-in" orders. However, as 
the small independents buy a very large proportion of their goods from 
the wholesalers while the chains buy relatively small quantities from 
the wholesalers, this is the best way of making a comparison of ex- 
penses. 



Chain Stores 189 

TABLE 22. EXPENSES OF INDEPENDENT WHOLESALERS 
AND RETAILERS AND OF CHAIN STORES 

(Per Cent of Sales) 

Type of Store Combined Expenses of Expenses of Chain Stores 

Wholesalers and Retailers (Federal Trade Commis- 

(Census Figures for 1929) sion Figures for 8 Years 

between 1913 and 1930) 

Drug 43.4% 32.4% 

Grocery 25.3 18.5 

Meat 26.6 20.0 

Furniture 46.6 37.2 

Men's clothing 39.9 30.4 

Men's furnishings .... 40.9 36.8 

Shoe 38.0 29.7 

Women's apparel 38.7 29.5 

expenses of chains selling men's furnishings were 4.1 
per cent lower than the expenses of the independents. 
The expenses of chains handling other types of apparel 
had expenses from 8 to 10 per cent below the inde- 
pendents. The food chains had an advantage in expenses 
of between 6 and 7 per cent. 5 

Differences in the operating expenses of chains and 
independents do not necessarily indicate the difference 
in their selling prices. The two profits of the whole- 
saler and retailer may be higher than the single profit 
of the chain. If so there will be a larger difference in 
their selling prices than is indicated by the expense 
figures. 6 

Advantages of chain stores. The chains have the fol- 
lowing advantages: lower cost of goods; lower prices; 
lower expenses because of integration, limited service, 
and efficiency; fresher goods; and relatively cheap and 
attractive advertising. 

6 Studies of the expenses of chains of various sizes show no particu- 
lar advantage for either large or small chains. 

6 A study by the Harvard Bureau of Business Research covering 
grocery stores shows a difference in expense of 6.8 per cent in favor of 
the chain, but a difference in margin of 82 per cent in favor of the 
chain. Bulletin No. 84. 



190 Chain Stores 

Cost of goods. Much has been said about the ability 
of the chains to obtain their goods cheaper than their 
competitors. Lower buying prices may be secured as 
a result of quantity purchases, cash payments, adver- 
tising allowances, brokerage fees, and shrewd buying. 
The chains often buy in large quantities, and quantity 
prices and discounts often enable them to secure some- 
what lower prices than their smaller competitors. Many 
chains are able to take all cash discounts offered on their 
purchases because they sell for cash or have ample 
capital or bank credit. 

Chains very commonly obtain advertising allowances 
from the manufacturers. Such allowances are presum- 
ably given to cover the featuring of the goods in the 
chains' own advertisements, in window and store dis- 
plays, and by their salespeople. In many instances, 
however, these advertising allowances appear to be 
merely price concessions. The chains are often able to 
secure such bargains as job lots and distress merchandise. 
The chain-store buyers may secure brokerage fees or 
commissions by buying direct from the manufacturers. 
In some cases brokerage organizations are set up to 
perform the broker's functions and secure his commis- 
sions. Chain buyers are often very close buyers, in- 
sisting on low prices, special allowances, or rebates. 
Many stories are heard of inside prices, special allow- 
ances, and checks for rebates mailed to the buyers 
months after purchases are made. 

An investigation made by the Federal Trade Com- 
mission found that manufacturers' prices to grocery, 
drug, and tobacco chains, after considering all discounts 
and allowances, averaged some 2 or 3 per cent lower 
than the prices to the wholesalers. As a rule, the chains 
seemed to receive somewhat lower prices than the de- 



Chain Stores 191 

partment stores, and the department stores somewhat 
lower prices than the wholesalers. Some of the ad- 
vantage of the chains resulted from taking more quantity 
and cash discounts than other buyers took. Such dis- 
counts are often open to all those who buy in as large 
quantities and who pay with equal promptness. A part 
of the advantage of the chains, however, apparently 
came from special prices and allowances that were not 
open to their competitors. It is interesting to note that 
the smaller chains sometimes obtained larger conces- 
sions than the large chains. 

Selling prices. Chain prices on staple, advertised 
grocery products have been found to be from 10 to 14 
per cent lower than the prices of independent stores in 
cities which the chains have recently entered. In cities 
where the independents have been faced with chain 
competition for several years, the chains have less ad- 
vantage. Studies on staple groceries in such cities have 
shown chain prices to be from 2 to 6 per cent below 
those of independents, and much of this difference may 
be due to the differences in credit and delivery services 
furnished by the two types of stores. Under competitive 
conditions we expect that the prices of competitors will 
eventually be brought fairly close together on goods of 
the same quality. Sellers with high prices must increase 
their efficiency or drop out of the market. 

The chains have less advantage in the sale of perish- 
able foods, such as meats, fruits, vegetables, milk, eggs, 
and poultry. Such products are often bought locally 
and the chains frequently buy from the same sellers 
as do the independents. Very often cash-carry inde- 
pendents have lower prices on such products than the 
chains. When the prices of all foods are averaged to- 
gether, the chains have less advantage than when only 



192 Chain Stores 

staples are considered. In one study in 1931, weighted 
average prices of all types of food stuffs, except fresh 
meats, showed the chains to be 8.4 per cent under the 
independents. However, the cash-carry chains were only 
4.2 per cent under the cash-carry independents. In a 
later study (1934) the advantage of the chains was 
even less 1 per cent in one city and 4 per cent in 
another. 

A government survey showed chain drug stores to 
undersell the independents by 15 to 18 per cent in 
different cities. Most of the chain drug stores were 
located in down-town districts where the cut-price policy 
could be profitably used in increasing volume, while 
many of the independents were in neighborhood loca- 
tions which are not adapted to the cut-price plan. An- 
other study showed cash chains to be from 6 to 22 per 
cent under cash independents in various cities. 

Chain and independent filling stations usually have 
the same prices on gasoline. 

On wearing apparel there are few data on comparative 
prices. Comparisons are hard to make, owing to the 
difficulty of finding garments known to be of the same 
quality. 

Expenses. The chain usually has lower expenses in 
operating its wholesale houses than do the independent 
service wholesalers. The chain has no salesmen. Sales 
force expense is usually the highest single expense of 
the service wholesaler, frequently making up a fourth 
of the wholesaler's total expense. The chain uses super- 
visors to oversee its retail stores, but the expense of 
the supervisors is smaller than that of the wholesaler's 
salesmen. The managers of the various stores in a chain 
requisition the goods either from the chain warehouse 
or from the manufacturers with whom the central buying 



Chain Stores 193 

office has made contracts. This saves the time of the 
retail store managers in interviewing salesmen. The 
chain-store warehouse has no credit and collection ex- 
pense, as it sells only to its own stores. It reduces 
delivery expense by operating its trucks on definite 
schedules and by sending them away from the warehouse 
fully loaded. Each store receives goods only on certain 
days. The independent wholesaler must make more 
frequent and smaller deliveries to hold his customers. 
The chain warehouse handles fewer articles than the 
independent wholesaler, for it does not have to cater to 
the whims of independent stores. This enables it to 
turn its stock faster. 

Chain-store warehouses can be located where trans- 
portation facilities are good and land is cheap, without 
regard to the convenience of its customers. Many chain 
warehouses are hew and well designed for economical 
operation. Goods may be handled by gravity, by endless 
belts, on skids moved on lift trucks, or by endless 
cables. 

Census data indicate that chain-store warehouses 
operate considerably cheaper than service wholesalers 
but only slightly cheaper than cash-carry wholesalers. 

Some chains operate factories to produce a part of 
the goods sold in their stores. Manufacturing is most 
common among chains selling hats, shoes, candy, and 
clothing. Grocery chains often operate bakeries and 
roast coffee, make salad dressings, and pack tea and 
butter. The operation of factories involves difficult prob- 
lems of management and prevents the chain from buying 
distress goods which at times can be bought at less than 
the cost of manufacturing them. The operation of fac- 
tories, however, eliminates the manufacturer's selling 
expenses and often enables the chain to secure goods 



194 Chain Stores 

cheaper than they can be bought from manufacturers. 

Limited service. Many chains operate on the cash- 
carry basis. This policy reduces 'operating expenses and 
makes possible lower prices, but it also limits sales, for 
some consumers desire credit and delivery services. 
Chains often carry limited stocks, which serves to reduce 
expenses for rent, stockkeeping, and spoiled goods. 
Again, however, this policy keeps some customers away. 
Some chains operate on a cash-carry self-service basis. 

Efficiency. The chain stores are usually large enough 
to take advantage of division of labor and to employ 
specialists to supervise various operations. The chain 
system can employ specialists to prepare its advertising, 
to plan window displays, to select locations for its stores, 
to plan the layout and arrangement of its stores, to 
develop accounting systems, to purchase its merchandise, 
and to hire and train its employees. If it operates on 
a service basis, it has specialists to pass upon credits, 
make collections, and supervise deliveries. Specialists 
may enable the chain store to perform these various 
operations more efficiently than they car be performed 
by the independent merchant, who must supervise all 
of these operations. 

In many instances the chains employ better mer- 
chandising than the independents. Their stores are often 
better arranged and better lighted, and the merchandise 
is displayed more attractively. They often have better 
stockkeeping systems, which enables them to turn their 
goods faster and to give the public fresher goods. 

Stock turnover. A faster rate of stock turnover is 
obtained in two ways: first, by reducing the number 
of items carried; and second, by carrying the same 
number of items but a smaller quantity of each by 
receiving shipments more frequently. In the grocery 



Chain Stores 195 

field many chain stores carry from 500 to 2000 items in 
stock, while the better independents frequently carry 
from 1500 to 4000. Chains carrying limited stocks realize 
that they lose some sales, but they choose to make their 
profits on the faster moving articles and allow the con- 
sumers who will not buy these to go elsewhere. In 
recent years, however, many chains have increased the 
number of articles carried in stock. Some chains have 
opened large down-town stores which handle staple and 
fancy groceries, meats, fruits, vegetables, and bakery 
goods, and operate soda fountains and lunch counters. 

Good stockkeeping methods enable the chains to re- 
ceive goods in smaller quantities and yet to keep their 
stocks fairly complete. Some surveys have shown that 
the chains were less frequently out of staple articles 
than were the independents. It has been estimated 
that the chain-store warehouse and retail store combined 
turn their stock on the average in less than one-half 
of the time required for a combined turnover by the 
wholesaler and independent retailer. 

No inherent advantage from efficiency. Better mer- 
chandising is not an inherent advantage of the chains. 
Independents can be just as efficient. The relative ad- 
vantage of the chain often comes from the inertia of 
the independent merchant, who has often been too lazy 
or indifferent to study and apply the common principles 
of merchandising. The hired managers of the chain 
stores know that they will lose their jobs if they do not 
carry out their instructions, while the independent dealer 
has no such direct stimulus. 

Advertising. Since the chain store usually has several 
stores in one city or trading territory, it can use news- 
paper space economically and pays for very little waste 
circulation. The large national chains can also employ 



Chain Stores 

magazine and radio advertising, for they have stores in 
many parts of the country. 

Location. The large chain store can employ experts 
to select the location for its various stores. The chain 
does not have to have a store in any particular place, 
and hence will not permit itself to be "squeezed" by 
a grasping landlord. The chain frequently studies the 
territory carefully and analyzes the value of different 
sites before it selects a location. 

Cut-price leaders. Many chains have made their ap- 
peal for business primarily on the basis of prices. Very 
frequently the chains have selected well-known articles 
for leaders and have quoted very low prices on these 
goods. The prices on these articles are counted upon 
to draw customers to the store who buy other mer- 
chandise which carries a larger profit. Many independ- 
ent stores, especially large city stores and stores in 
cooperative chains, are now also using this method, so 
that the chains are losing some of their relative ad- 
vantage. 

Limitations and disadvantages of chains. The chains 
that operate on a limited service basis lose a certain 
amount of trade from people who want to buy on credit, 
who want goods delivered, or who want goods not carried 
by the chains. The chain has difficulties and expenses 
in management. A large organization often has diffi- 
culty in keeping all its employees alert and in seeing that 
its policies are carried out by all its employees. The 
chains must employ supervisors to check the operations 
of its various managers. The use of supervisors, spe- 
cialists, and experts adds to expense. The experts make 
many mistakes; many locations are selected that prove 
unprofitable; money is lost in experimenting with new 
policies; and some chains have expanded so fast that 



Chain Stores 197 

they have had to employ poor managers and super- 
visors. Sound policy limits expansion to the rate at 
which men can be trained for managerial positions. 

Hostile public opinion. Much anti-chain propaganda 
has been distributed in recent years. The chains have 
been pictured as huge corporations controlled by Wall 
Street and taking money out of local communities. It 
is said that they do not fully support local enterprises 
in the communities where their stores are located; that 
they may become monopolies; and that they take away 
from young men the opportunities to establish their own 
businesses. Several states have enacted discriminatory 
chain-store taxes. Oil refiners have sold some of their 
filling stations in these states. 

The chains answer the argument that they take money 
out of the community by pointing out that the inde- 
pendent merchant usually purchases his goods from 
wholesalers and manufacturers located in other towns. 
The only difference is that the chain store takes away 
its profit and distributes it to its stockholders who are 
often scattered throughout the country. The chain 
stores argue that they undersell the independents, so 
that the consumer makes a saving by buying at the 
chain; and that the money saved is spent in the com- 
munity, so that actually more money is spent in the 
community because of the chains. 

To illustrate, suppose that the independent grocer sells 
a staple article for one dollar and sends eighty cents of 
this out of the community to pay for the article. His 
operating expenses are 18% and his profit is 2%. Pre- 
sumably, therefore, 20 per cent is spent in the commu- 
nity. The chain store sells this article for ninety-one 
cents and sends seventy-nine cents out of the community 
to pay for the article. Its operating expenses are 



198 Chain Stores 

and its profit is 2%. The operating expenses are spent 
in the community, but the profit goes to its stockholders 
who may live elsewhere. The chain argues that the nine- 
cent saving to the consumer is spent in the community, 
so that actually 21 cents is kept in the community when 
the article is bought at the chain store, whereas only 20 
cents is kept in the community if the article is bought 
at the independent store. Most communities have stock 
and bond holders who receive money from other com- 
munities and thus compensate for the profits which local 
enterprises may send to outside owners. 

In the past there probably was considerable truth in 
the statement that the chain stores did not support 
community enterprises. In recent years, however, most 
of the chains have joined the chambers of commerce and 
subscribed to the community chests or other local social 
agencies. Local people, however, often feel that the 
chains are not yet carrying their full responsibility for 
local enterprises. 

The chains continue to grow, but as yet no single 
chain has become a monopoly, although, as a group, the 
chains are dominant in certain trades in certain terri- 
tories. It is better to prevent monopolies than to try 
to regulate them or divide them up once they are formed. 
Although no chain yet has a monopoly, such a monopoly 
is possible at some future time. Perhaps this danger 
has been in the minds of some state legislators in voting 
for discriminatory chain-store taxes. Such taxes have 
been enacted in several states. They have forced a few 
stores out of business, and may be made to force more 
out in the future. Such taxes tend to take away some 
of the operating advantage of the chain and thus injure 
consumers who want to buy at low prices. 

The chains have suffered somewhat from hostile 



Chain Stores 199 

public opinion and from the feeling of some consumers 
that they should buy from home-owned stores. On the 
other hand, most consumers apparently believe that the 
chains undersell the independents. As long as this is 
true, the goodwill of the chains will outweigh their ill- 
will. 

Conclusions on chains. Many consumers have un- 
doubtedly benefited by the lower prices of the chains. 
The price advantage of the chains has apparently de- 
creased in recent years as independent stores have im- 
proved their methods of buying and increased their 
efficiency. It is possible for the independents to operate 
their stores just as efficiently as the chains. Some have 
felt that the chains have an inherent advantage in being 
able to buy their goods cheaper, and national legislation 
is urged to prevent such large price discriminations. 
The independents, however, arc helping themselves by 
the formation of cooperative buying organizations which 
enable them to buy more nearly on the same basis as 
the chains. Such organizations are discussed in the next 
chapter. 

Chapter 11 
Review Questions 

1. What is a chain store? A chain store system? 

2. What are the types of chain stores? 

3. What can you say of the growth and present impor- 
tance of chain stores? 

4. In what lines do the chains have the largest volume 
of business? Why? 

5. In what lines are the chains relatively the most im- 
portant? Relatively the least important? 

6. How are chains organized? 



200 Chain Stores 

7. How may the expenses of chains and independents be 
compared? 

8. What are the chief advantages of chain stores? 

9. What advantages do the chains secure from division 
of labor and the employment of experts? 

10. What advantages do the chains secure from integra- 
tion? 

11. What is meant by good merchandising? Do the chains 
have better merchandising than the independents? 

12. How do the chains reduce expenses? Do they have 
lower expenses than independent stores handling similar 
goods? 

13. What advantage does the chain system have in adver- 
tising? 

14. How do the large chains select locations for their 
stores? 

15. What use do the chains make of cut-price leaders? 

16. What are the chief disadvantages of the chains? 

17. What difficulties of management do the chains en- 
counter? 

18. What arguments are made against the chains by propa- 
gandists? 

19. What is meant by saying that the chains take money 
out of the community? Is this a true statement? 

20. What can you say of the argument that the chains do 
not support community enterprises? 

21. How do the buying prices of the chains compare with 
those of the wholesalers? 

22. How do the average selling prices of the chains com- 
pare with those of the independents? 

Thought Problems 

1. It has been said that the chain is primarily adapted 
to an urban territory and that it loses many of its advantages 



Chain Stores 201 

when it scatters its stores throughout rural territories. What 
is the basis for this statement? Is it true? 

2. Is the use of cut-price leaders good merchandising? 
It is argued, for example, that every article should make a 
profit and that it is wrong to sell an article below cost (ex- 
cept, of course, old or soiled goods or goods in which the 
dealer is overstocked). 

3. What do you think of the arguments that the chain 
store is an evil because it takes money out of the commu- 
nity? 

4. What do you think of the argument that the chain 
stores are niggardly and avaricious because they do not sup- 
port community enterprises? 

5. Should the chains be curbed by legislation? Are they 
in the interests of the consumers? Or are they public men- 
aces? 

6. Is the chain an inherently better type of organization 
than the wholesaler-retailer type, or has it grown because it 
has been more efficiently operated? 



CHAPTER 12 
Meeting Chain Competition 

What the independent merchant can do to meet chain 
competition. The independent merchants have been 
much worried by the continued growth of the chain and 
of other large, integrated retail stores. The chains have 
three major advantages over the independents: (1) op- 
erating efficiency secured through a division of labor and 
the employment of specialists and merchandising ex- 
perts; (2) advertising; and (3) large buying power, 
often combined with the operation of wholesale houses. 

Individual action. What can the independent do to 
overcome these disadvantages? He can improve his 
efficiency and become a better merchant. He can se- 
cure a good location for his store, select his goods care- 
fully, display them well, arrange attractive store and 
window displays, practice good salesmanship, train his 
employees to give cheerful and courteous service, turn 
his stock rapidly, keep adequate records, sell for cash or 
extend credit carefully, collect his accounts promptly, 
and advertise enticingly. If the merchant can do all 
of these and besides put his own personality and indi- 
viduality into his business, he will have no trouble com- 
peting with large retail organizations. 

Can the independent retailer do all of these things? 
Some do, and grow and prosper right alongside of chain 

stores. Others are incapable of doing so. It is hard for 

202 



Meeting Chain Competition 203 

one man to be as efficient in all departments of his busi- 
ness as are the specialists employed by the chains. It 
takes a good man to meet chain-store competition in- 
dividually. 

Price leaders. Many dealers have said that the large 
chain and department stores do not undersell them on 
all articles, but only on their specials or cut-price leaders. 
Many independent merchants have therefore adopted 
cut-price leaders to attract customers to their stores and 
to give the consumers the idea that their prices are as 
low as those of the chain stores. Some independent 
merchants seem to have used specials to very good ad- 
vantage, even though they could not always buy them 
as cheaply as their large competitors. The danger is 
that they will lose more on the leaders than they will 
make on the increased sales of other goods. The inde- 
pendents are also often handicapped in advertising their 
cut-price leaders to the public. 

A survey of grocery advertising in 111 New England 
newspapers found 28 products advertised by both the 
large chains and the independents. The independents 
had the same prices as the chains in 41 per cent of the 
advertisements, lower prices in 36 per cent of the ad- 
vertisements, and higher prices in 23 per cent of the 
advertisements. 1 

Service. Some independents have felt that the chains 
secure most of their advantage from operating on a cash- 
carry basis, and that the way to meet chain-store compe- 
tition is to operate on the same basis. This has been 
successful in some instances, but in many cases it has 
not enabled them fully to meet chain-store prices. Other 

1 Independent stores both in and out of cooperative chains were 
included. 



204 Meeting Chain Competition 

independents have felt that the best way to meet chain 
competition is to emphasize credit and delivery service 
and to give careful attention to the needs and wishes 
of their customers. No generalization can be made as 
to which is the better method. Local conditions, the 
type of customers, and the dealer's own ability are 
probably the determining factors. 

Collective action. Although the independents can do 
much individually to meet chain competition, they can 
do more cooperatively. They were very slow in learn- 
ing how to cooperate, but much progress has been made 
in cooperative ventures during the past few years. Col- 
lective action may lead to cooperative advertising; to 
the employment of merchandising specialists or experts; 
to research; to cooperative buying; and to the operation 
of wholesale houses by the retailers. 

Advertising. A common form of cooperative advertis- 
ing is that done by retail grocers in various localities. 
Such advertisements generally feature certain cut-price 
specials used to meet the prices of the chain stores. 
These leaders are often sold at or near cost and in many 
instances are supplied by the wholesalers at cost. The 
advertisement may feature two lists of articles : first, the 
leading specials (usually 4 to 8 articles) sold at cost; 
and second, articles which are good values, but which 
carry at least small margins. 

Many of the retailers are unable to utilize newspaper 
advertising individually, owing to the small portion of 
the town from which they draw their trade. A number 
of stores located in different parts of the city may, how- 
ever, be able to use newspaper space very advantage- 
ously. In many cases, the advertising retailers operate 
on a service basis and feature this service in their ad- 



Meeting Chain Competition 205 

vertising. They may also point out that the stores are 
all "home owned" and ask for trade on this basis. A 
part of the cost of the advertising is often paid for by 
manufacturers whose products are featured. 

In some cities, an organization may not have stores 
in all parts of the city, and so cannot economically utilize 
the daily papers. In such cases, they may use handbills, 
direct-mail matter, or window signs supplied by the as- 
sociation or wholesaler. 

Supervision. Many cooperative groups of retailers 
employ trained specialists to help the retailers improve 
their methods and to become better merchants. These 
specialists may prepare window displays, store layouts, 
accounting systems, or copy for advertisements. They 
may visit the stores and give advice to dealers. The 
weakness of such supervisors is that they can only give 
advice, whereas the supervisors in the chains give in- 
structions. Many of the independent retailers do not 
follow the advice offered by the supervisors. On the 
other hand, the chain-store manager who does not fol- 
low instructions is likely to lose his job. In the whole- 
sale type of cooperative chain, the salesmen for the 
wholesalers are often expected to act as supervisors. 
These men are primarily salesmen and often make poor 
supervisors. 

Research. Because many of the stores are too small 
to afford research departments and because much valu- 
able information must be secured from a large number 
of stores, several groups of retailers carry on research 
work cooperatively. Cooperative research may follow 
style trends, may analyze past sales, may compile figures 
showing operating costs, may develop stock control 
methods, may develop methods of selecting or training 



206 Meeting Chain Competition 

employees, or may compile other facts useful to the 
stores. 2 

Buying. Perhaps buying is the most important coop- 
erative activity among independent retailers at present. 
Many feel that the large buying power is the greatest 
advantage of the chain. 

Types of organizations. Some of the more important 
types of organizations are buying clubs, cooperative 
chains, and buying groups. Cooperative, or voluntary, 
chains may be organized by retailers or by wholesalers. 
The retail type of cooperative chain may buy goods 
jointly through some form of a buying club, may buy 
from a mutual wholesaler, or may own and operate its 
own wholesale house. The wholesale type is usually 
organized by a private wholesaler, or by a national or- 
ganization which works through private wholesalers in 
various parts of the country. 

The buying club. For many years, groups of retailers 
have cooperated to secure quantity prices. The manu- 
facturer may offer a quantity price on fifty cases. One 
dealer may be unable to use such a large quantity. He 
therefore calls other dealers in his town and arranges 
with them to pool their orders so that they can get the 
quantity price. A buying club, however, is more than 
this. It usually has a formal organization and pools 
orders for its members more or less regularly. The re- 
tailers in the club jointly, or through a buying com- 
mittee, select the articles upon which lower prices can 

2 Research is carried on by groups of both small and large stores. 
The Retail Research Association and the Cavendish Trading Corpora- 
tion are examples of research organizations maintained by groups of 
large department stores, and the National Retail Hardware Associa- 
tion is an example of an organization with a research department 
maintained by a large number of small stores, 



Meeting Chain Competition 207 

be obtained by buying in larger lots. They may secure 
quantity prices from wholesalers, or they may buy from 
manufacturers, farmers' cooperative associations, or 
brokers. 

One member often places the order for the goods. He 
may keep the goods in his store until the members call 
for them or the members may call for them at the 
freight station. All the buying may be done by one 
member or may be done in rotation by the various mem- 
bers. When done by one member it may place a serious 
burden on him, for many of the retailers do not call for 
their goods promptly. In some cases they do not have 
the money, and either leave the goods until they get 
the cash or ask the buying member to trust them for 
a few days. The only way to be safe on pooled orders 
is to require the retail members to make cash deposits 
when the order is placed. 

At times the buying club develops so that a part-time 
paid secretary is employed. In some instances the sec- 
retary may keep a limited quantity of goods on hand 
or even make deliveries to the stores of the members. 
In this case it has begun to operate a wholesale house. 
The buying club attempts to secure wholesale prices 
without incurring the expenses of operating a wholesale 
house. It is very difficult to do this except on a limited 
number of purchases. The successful buying club may 
therefore decide to secure and operate a wholesale house. 

Retailer-owned wholesale house. There has been a 
considerable growth of retailer-owned wholesale houses. 
There are a hundred or more in the grocery field, about 
a score in the drug trade, and some half dozen in the 
hardware field. In such houses the retailers own the 
stock and elect the managers. Such houses are usually 



208 Meeting Chain Competition 

operated on an economical basis, employing few sales- 
men. Among grocery houses only one-fifth report the 
use of salesmen. 

The retailers send in their orders by telephone or by 
mail. These wholesale houses usually carry more or less 
limited stocks of goods, sell for cash or offer short credit 
terms, and give a limited delivery service. In these 
ways they reduce their operating expenses very materi- 
ally. A government study shows that the average re- 
tailer-owned wholesaler in the grocery trade operated 
on an expense of 4.1 per cent; this compares with ex- 
penses of 5.5 per cent for private cash-carry wholesalers 
and over 9 per cent for private wholesalers operating 
on a service basis. The private hardware wholesaler is 
said to have expenses of from 15 to 20 per cent, while 
the retailer-owned house operates on an expense of 8 
to 10 per cent. In the drug trade the average expenses 
of the retailer-owned house are about 8 per cent, com- 
pared with about 16 per cent for private service whole- 
salers. A government study showed that in the grocery 
trade the average retail member purchased $6,191 worth 
of goods per year from his wholesale house; of this total 
27 per cent was purchased on a credit basis and 25 per 
cent was delivered to him free. 

It is evident from the above figures that the retailer- 
owned wholesale house can materially reduce the prices 
to its retail members. It, however, does not offer them 
as much service as the private service wholesaler. The 
retailers must send in their own orders, must pay for 
the goods more promptly, and often must haul them to 
their stores or pay for delivery. It is also at times im- 
possible to secure all of the goods needed from such 
wholesale houses. 

Very often cooperative chains are operated in con- 



Meeting Chain Competition 



209 



nection with the retailer-owned wholesale houses. The 
retailers may select price leaders, which are then adver- 
tised cooperatively; they may have uniform store fronts; 
and the organization may supply its members with 





Chain Store 
Trade Channel 



Near-Chain 
Trade Channel 



KEY: M Manufacturer ; R Retailer; Mu.W. Mutual Wholesaler; 

RO.W. Retail-Owned Wholesale House; C Consumer; 

C.W. Chain Store Warehouse 

Fig. 19. Chart illustrating how the co6perative chain and the 
mutual wholesaler attempt to secure the same advantage as is 
secured by the chain store in eliminating the wholesaler's sales- 
men and their expense. Note that wholesaler's salesmen are elimi- 
nated as is done by the chain store and that the wholesaler serves 
much the same purpose as the chain store warehouse. 

merchandising helps, plans for store arrangements, win- 
dow displays, and advertising copy. 

Disadvantages of the retailer-owned wholesale house. 
An important disadvantage of the retailer-owned 
wholesale house is that it is managed by hired employees, 
although the retailers devote a part of their time to its 
supervision. The retailers either must take this time 



210 Meeting Chain Competition 

away from their retail stores or neglect the supervision 
of the wholesale house. This management difficulty 
appears to be a more or less inherent disadvantage of 
all cooperative ventures. It is also hard to keep up the 
interest and cooperation of the members, and energy 
must often be devoted to securing new members. Owing 
to their limited capital, some retailers find it hard to 
buy stock in the wholesale house. 

Mutual wholesalers. The operation of mutual whole- 
salers was described in Chapter 7. They operate much 
as do the retailer-owned wholesale houses, and in prac- 
tice it is often difficult to tell whether a wholesale house 
is mutual or a retailer-owned wholesaler. The difference 
is that the majority of stock in a mutual house is owned 
privately and not by the retail members. The control 
is thus, strictly speaking, in the hands of a private or- 
ganization. 

Wholesaler-retailer cooperative chains. The whole- 
saler-retailer cooperative chains, or as they are some- 
times called, vendor-tie-ups, have been organized by 
private wholesalers. Such organizations have had their 
largest growth in the grocery trade. Most of these 
chains have been started since 1925. 

The wholesalers usually maintain their outside sales- 
men, extend credit, and give free delivery to many of the 
retailers. It is apparent from this that they reduce 
operating expenses little, if any. Their services to their 
retailers often consist in providing price leaders at a 
cost low enough to allow the retailers to meet chain- 
store prices; cooperative advertising; advice given by 
their salesmen or by merchandising specialists; and the 
privilege of using their name. The cooperative adver- 
tising and price leaders are apparently the greatest ad- 
vantages to the retailer. The cooperative chain 



Meeting Chain Competition 211 

sponsored by the wholesaler lays much more emphasis 
on selling the idea than does the chain sponsored by the 
retailers. This perhaps explains its rapid growth in 
spite of the fact that it apparently does not supply the 
retailer with goods as cheaply as does the retailer-owned 
house. A government study covering approximately 
fifty of such group shows the average sales of the whole- 
salers to be approximately $2,000,000, of which about 
one-half was made to members of the cooperative chain 
and about one-half to other retailers. The average sales 
to retail members was $6,767, of which 80 per cent was 
sold on credit, 17 per cent was sold on a cash-carry basis, 
and 53 per cent was delivered free to the retailers. 

Importance of cooperative chains in the grocery trade. 
The Federal Trade Commission estimated that in 1929 
there were 395 cooperative, or voluntary, chains in the 
grocery trade, with a membership of 53,400 independent 
retail grocers. There were, in comparison, 788 corporate 
chains with 53,500 stores. The average sales of the 
cooperative stores were $12,000, compared with $54,000 
for chain stores. The average chain store was thus four 
and one-half times as large as the average store in a 
cooperative chain. The number of retailers who were 
members of cooperative chains has grown very fast in 
recent years. The American Institute of Food Distri- 
bution, Inc., reported nearly 800 cooperative chains in 
1935 with 104,000 members; this was double the number 
of stores operated by grocery chains. It may be esti- 
mated that these cooperative chains do nearly two-thirds 
as much business as the corporate chains. 3 The coopera- 
tives appear to be growing faster than the chains. It 
appears that there may soon be only three types of 

3 The American Institute of Food Distribution, Inc., however, claims 
that these cooperatives do as much business as the corporate chains. 



212 Meeting Chain Competition 

independent grocery retailers: those in cooperative 
chains; those operating large markets who are large 
enough to buy on favorable terms; and those operating 
small neighborhood stores who exist because of their 
convenience to the people in their immediate neighbor- 
hoods or because of their low operating expenses and 
the small returns which they receive for their time. 

Prices. We may assume that the wholesale houses of 
the cooperatives buy as cheaply as other wholesalers. 
As indicated in the preceding chapter, this would mean 
slightly higher cost prices than those obtained by the 
chains. It would appear that the low expenses and 
margins of retailer-owned wholesale houses would enable 
the retail grocers to secure goods from them for 5 to 6 
per cent less than from service wholesalers, and perhaps 
for 1 to 2 per cent less than from cash-carry and mutual 
wholesalers. Some of the wholesalers who sponsor chains 
have reduced their expenses sufficiently to enable them 
to give their retailers somewhat lower prices. Others 
who have retained their salesmen and offer the retailers 
merchandising assistance have not decreased their ex- 
penses, and so appear to be able to offer their retailers 
little price advantage. 

Very few data are available showing comparative re- 
tail prices to consumers offered by cooperative chains 
and other types of retailers. The fact that the chains 
show relatively little price advantage over the inde- 
pendents in some of the larger cities 4 may be due to the 
fact that the retailers there have long had cooperative 
buying organizations. Four recent studies in the mid- 
west have compared the prices of cooperative grocery 
chains with those of other independents. In two of these 



1 For example, Philadelphia, New York, and San Francisco. 



Meeting Chain Competition 213 

studies, the cooperatives were shown to have lower prices 
than other independents but not as low as those of the 
chains. In the other two studies, the cooperatives were 
shown to have somewhat higher prices than other inde- 
pendents. These higher prices were apparently caused 
by the fact that the cooperatives rendered more services 
than other independents. 

Cooperative drug and hardware chains. Estimates 
for 1929 showed over 30 cooperative drug chains, with 
some 12,000 members whose sales were less than 5 per 
cent of the total sales of all drug stores. There were a 
half dozen or more cooperative chains or retail-owned 
wholesale houses in the hardware trade, but the total 
sales of their members were less than 1 per cent of the 
total hardware sales in the country. Cooperative chains 
in these fields have devoted most of their attention to 
buying goods for the retailers at low prices and relatively 
less attention to giving advertising and other merchandis- 
ing assistance to their members. The available figures 
indicate that the wholesale houses were able to save the 
retailers over 6 per cent in the drug field and 10 per cent 
in the hardware field. These were larger savings than 
were realized in the grocery field. In spite of these 
greater savings the cooperatives have grown relatively 
less than those in the grocery field. The explanation is 
that chain competition has been less severe in these 
fields, and that the retailers dislike to give up any of 
their freedom in operating their businesses. Much is 
heard of cooperation in these fields, and as chain competi- 
tion becomes more severe, more cooperation among re- 
tailers may be expected. It would seem to be desirable 
for the independents to organize cooperative chains in 
advance of the growth of corporate chains and so pro- 
tect their position. However, people don't seem to work 



214 Meeting Chain Competition 

that way they hesitate to make changes until competi- 
tion forces them to. 

Group buying. A buying group is a group of stores 
or manufacturers which selects merchandise jointly and 
places the orders together. In the retail field, group 
buying is most commonly practiced by department, 
clothing, and furniture stores. 

There are two advantages to group buying: better 
selection of merchandise through the combined judg- 
ment of a number of buyers, and quantity discounts or 
prices by placing large orders. The main limitations of 
group buying are the differences in the needs of different 
stores and the difficulty of getting the various buyers to 
work together. If the stores in a group cater to different 
classes of trade, it will be difficult to buy merchandise 
jointly. Members of a buying group are commonly lo- 
cated in different towns, and, with style merchandise, 
the stores in different towns may have different fashions 
at a given time. Fashions, however, are becoming more 
uniform through the country, and it has been demon- 
strated by the chain stores and by several buying groups 
that popular priced women's wear and men's apparel 
can be bought collectively. Group buying is said to be 
particularly important to the department stores located 
in the smaller cities and in the outlying shopping sections 
of the larger cities. These stores are often too small to 
secure the most favorable quantity prices and may not 
have expert buyers for all types of merchandise handled. 

The personal factor of tens limits group buying : buyers 
may fear the loss of their prestige or of their positions 
and so oppose cooperative buying. 

Selection of goods. Some stores report that the joint 
selection of merchandise is the principal advantage of 
group buying. The judgment of several buyers is better 



Meeting Chain Competition 215 

than that of an individual. Of course, if the buyers make 
their selections hastily, poor merchandise may be chosen. 
The buyers meet to inspect the samples and to select 
the best values offered. The reliability of the manufac- 
turers and their ability to deliver the quantities wanted 
by the group must also be considered. It has been 
thought by some that the group tries merely to get the 
lowest price possible. Such a practice is bound sooner 
or later to lead to a cheapening of the merchandise, and 
to avoid this danger groups may start with a definite 
price and select the best merchandise that is offered at 
that price. 

Lower prices. The group may be able to secure lower 
prices. For example, a dress which has been retailing at 
$15.75 and which was purchased at $10.75 may, by the 
larger purchases, be bought for $10. This 75 cents may 
be kept to increase the retailers' profits, or it may be 
passed along to the consumers in lower prices. One 
large department store had been buying a certain type 
of screen in lots of 1,000 dozen and getting 10 and 5 per 
cent discounts off the manufacturer's price. 5 Other stores 
in the group were getting 10 and 2 per cent, and 7 and 5 
per cent off. As a result of the group activity, better 
prices were obtained, particularly by the smaller stores 
in the group. Savings of from 5 to 12 per cent are 
mentioned as possible through group buying. A group 
of women's coat and suit manufacturers were found by 
the U. S. Department of Commerce to give average dis- 
counts of 4.4 per cent to buying groups. 

When first organized, buying groups commonly went 

6 Trade discounts are deducted in succession, so that each one ap- 
plies to the net amount after the preceding one has been deducted. 
Thus if an article is priced at $10, with 20, 10, and 5 per cent off, the 
buyer pays $6.84 ($10 20% = $8; $8 10% = $7.20; $7.20 5% = 
$6.84). 



216 Meeting Chain Competition 

to the manufacturers and asked for a special price on a 
certain quantity of goods. The order was placed on the 
basis of the quoted price. If all goods were for immedi- 
ate delivery, the manufacturer might be rushed to make 
delivery and then find business very slack. When de- 
liveries were made over a period of time, it often 
happened that the member stores did not buy as much 
as they had promised when the order was placed a 
practice which was unfair to the manufacturers, who 
naturally felt they had been cheated. To avoid this 
difficulty another method was developed. The buying 
group selects what are called preferred resources of 
supply manufacturers with whom the buyers are to 
place all possible business. The manufacturers agree to 
give a sliding scale of discounts based on the total quan- 
tity purchased by members of the group during a given 
period. For example, a manufacturer of men's clothing 
may agree to give the following discounts to members of 
a group on purchases made during a six months' period : 
5 per cent on sales of $100,000; 7 per cent on sales of 
$200,000; and 10 per cent on sales of $300,000. The 
manufacturer is thus enabled to operate his plant more 
regularly. The stores obtain the merchandise as needed 
and still receive quantity discounts based on the total 
purchases of all stores in the group. 

A considerable development in group buying has 
taken place, although the total quantity of goods in the 
apparel field bought in this way is estimated to be less 
than 10 per cent. Some groups report their greatest 
success in buying supplies (for example, wrapping paper, 
boxes, twine, excelsior, tires, and gasoline) and such 
staples as sheets, towels, and kitchen ware. 

A recent report listed 17 important buying groups in 
the department store field with 500 stores as members. 



Meeting Chain Competition 217 

This included some ownership groups or chains of de- 
partment stores which do not have central management 
but which do buy some goods cooperatively as groups, 
and some small chains of department and apparel stores. 
The total sales of the stores in these groups were given 
as $1,700,000,000. If 10 per cent of their total purchases 
is made jointly, the total volume of joint purchases 
would be $170,000,000. There are also many smaller 
buying groups. 

Other forms of collective action. Retailers often 
cooperate in other ways. In several towns they have 
organized cooperative delivery systems. Under such a 
system one organization supplies the trucks and makes 
all deliveries for the retailer members. 

In more than 1,000 cities and towns the retailers co- 
operate to gather credit information to be used in ex- 
tending credit to the consumers. In a very large 
proportion of these cities , the retailer-owned credit 
bureaus operate collection agencies to make collections 
from slow accounts. 

Chapter 12 
Review Questions 

1. What three major advantages do the chains have over 
the independents? 

2. What can the independent merchant do individually 
to meet chain competition? 

3. Can the independent merchant merchandise his store 
as efficiently as the chain? 

4. What use can the small independent merchants make 
of price leaders? 

5. What can the independents do collectively to meet chain 
competition? 



218 Meeting Chain Competition 

6. What important types of organizations have been 
formed to help the independents? 

7. How can the independent retailers advertise collec- 
tively? 

8. Can the independents secure trained specialists to help 
with the supervision of their stores? If so, how? If not, 
why? 

9. How may independents cooperate to carry on research? 

10. How do retailers cooperate to buy merchandise? 

11. What is a buying club? How does it operate? 

12. What advantages may the retailers secure from a buy- 
ing club? 

13. What are the limitations on the activities of a buying 
club? 

14. What is a retailer-owned wholesale house? How are 
such houses owned? How are they managed? 

15. What services do retailer-owned wholesale houses usu- 
ally perform? How do they limit expenses? 

16. How do the expenses of retailer-owned wholesale houses 
compare with the expenses of private wholesalers handling 
similar goods? 

17. What advantages does a retailer obtain from buying 
from a wholesale house in which he is part owner? 

18. What are the disadvantages of buying from a retailer- 
owned wholesale house? Can the retailer secure all of his 
goods from such a house? 

19. What is a mutual wholesaler? Compare and contrast 
the mutual wholesale house with the retailer-owned house. 

20. What is meant by a wholesaler-sponsored cooperative 
chain? 

21. How are such cooperative chains organized? What 
are their advantages to the wholesaler? To the retailers? 

22. What are the relative advantages to the retailer of 



Meeting Chain Competition 219 

belonging to a cooperative chain organized by retailers and 
of belonging to one sponsored by a wholesaler? 

23. What is meant by group buying? Among what types 
of stores does it exist? 

24. What are the advantages of group buying to the re- 
tailers? 

25. What are the disadvantages or limitations of group 
buying? 

26. In what other ways than those already discussed may 
the retailers cooperate to further their interests? 

Thought Problems 

1. Can an independent retailer in the grocery field meet 
chain-store competition acting individually? If so, how? 
If not, why? Would your answer be different for retailers in 
other trades? 

2. Should the independent retailer trying to meet keen 
chain-store competition go on a cash-carry basis or emphasize 
credit and delivery service? 

3. What use can the independents make of price leaders 
in meeting chain-store competition when acting alone? When 
acting together with cooperative advertising? How do the 
independents secure goods to be used as leaders? Can they 
meet chain-store prices on cut-price leaders? It is said that 
the public compares prices only on a few staple or standard 
articles, and that if the independents meet the chain prices 
on these, the public will think they are as cheap on other 
articles. Comment on this statement. 

4. One difficulty with cooperative advertising is that the 
same articles do not appeal to the customers of all the stores, 
A low-quality article may not appeal to a retailer with a 
high-class trade, while a high-quality article may be unat- 
tractive to a dealer with a low-class trade. Comment. How 
should the articles to be advertised as leaders be selected? 
Is it necessary that all cooperating dealers have the adver- 
tised articles in stock? Is it necessary for all stores adver- 



220 Meeting Chain Competition 

tising cooperatively to operate on the same basis cash-carry 
or credit-delivery? 

5. Do the cooperative, or voluntary, chains have all the 
advantages of ownership chains? Can you enumerate any 
places where they are superior to the chains? Any places 
where they are inferior? Will they enable the independent 
retailers to hold their own against the chains? 



CHAPTER 13 
Marketing Industrial Goods 

Industrial goods. Industrial goods are goods used in 
the production or distribution of other goods and serv- 
ices. They are sold principally to such business concerns 
as factories, railroads, mines, public utilities, and offices. 
They are bought for use in business and not for con- 
sumer-satisfaction. Many of the buyers are expert 
judges of the quality of the goods purchased. The de- 
mand for industrial goods varies much more than the 
demand for consumers' goods. Equipment is most often 
replaced when business is good and the manufacturers 
are prosperous. When sales are increasing, the manu- 
facturers erect buildings and buy new equipment; when 
sales are declining, little money is spent for new build- 
ings and equipment. In 1929 industrial sales totaled 
41 billion dollars. Such sales declined greatly in the 
following three years. To illustrate the extent of the 
decline, the sales of wholesale establishments selling 
machinery and equipment declined from 3 billion dollars 
in 1929 to 1.3 billion dollars in 1933 a decline of 58.6 
per cent. 

Kinds of industrial goods. There are many kinds of 
industrial goods lathes, drills, looms, steam shovels, 
locomotives, ships, tractors, trucks, filing cabinets, time 
clocks, bookkeeping machines, dynamos, engines, tur- 
bines, oil, iron, steel, ores, wool, wheat, cotton, copper, 
tin, lead, hides, leather, and so on. Many farm products 

221 



222 Marketing Industrial Goods 

are raw materials and hence industrial goods. For prac- 
tical reasons, however, the marketing of farm products 
is considered separately. 

In Chapter 4 industrial goods were divided into equip- 
ment, supplies, raw and partly finished goods, and fabri- 
cated parts. 

Overlapping with consumers' goods. Many products 
are both industrial and consumers' goods. Flour sold to 
a bakery is an industrial goods (raw material), while 
flour sold for domestic consumption is a consumer goods. 
Lubricating oil sold to factories is an example of in- 
dustrial goods, while the same oil sold at retail for use 
in a pleasure car is a consumers' goods. The consensus 
of opinion is that when a seller's product is sold to both 
markets, two sales organizations should be maintained. 
The type of salesmen needed and the problems in the 
two markets are different. 

Equipment. There are many types of equipment. 
Some equipment is highly specialized and some is fairly 
well standardized. Some pieces, like rolling mills, loco- 
motives, blast furnaces, and turbines, are very large; 
others, like hand tools, are small. Equipment may be 
roughly divided into two classes: large machines that 
are built to order for the buyers, and smaller devices that 
have a wide market and that are commonly built in 
quantities and carried in stock ready for delivery by the 
makers or dealers. 

Equipment has a relatively long life and is often ex- 
pensive; replacements come at infrequent intervals. 
The purchase of new equipment is a matter of great 
importance to the buyer, and new capital or long-time 
credit may have to be secured. 

Obsolescence. The value of equipment depends pri- 
marily upon its design and construction. Since new de- 



Marketing Industrial Goods 223 

vices are constantly being developed and old designs are 
constantly being improved, equipment is often made 
obsolete by new inventions. New designs reduce the 
amount of labor required, increase the speed of produc- 
tion, improve the quality of the goods produced, or save 
raw materials or fuel. Old equipment may be junked 
or sold to- smaller plants long before it is worn out. It 
is wasteful and expensive to keep old machinery in use 
when newer machinery will reduce the cost of produc- 
tion. 

The buyers. Specialized products have a definite 
number of users. For example, looms are used only by 
textile mills, and dynamos are used only by concerns 
that generate electricity. Producers of such goods have 
a very definite market. Sales depend upon the replace- 
ment of worn out or obsolete machinery, the expansion 
of old plants, and the building of new plants. The 
sellers can keep in touch with the present users through 
salesmen, trade papers, and direct-mail advertising. 
Building contracts, trade gossip, and the incorporation of 
new companies may give news of new plants. 

On the other hand, some equipment is used by a great 
variety of business concerns. Motor trucks are used by 
different types of factories, mine operators, contractors, 
public utilities, wholesalers, retailers, trucking com- 
panies, and farmers. Hand trucks are used by many 
types of factories, warehouses, wholesalers, railroads, and 
hotels. Time clocks may be used by any concern with 
a large number of employees. The maker of such 
products has many types of potential customers. He 
may advertise in different trade papers and in magazines 
with general circulations. His salesmen may have many 
prospects in a given territory. 



224 Marketing Industrial Goods 

Sales methods. The manufacturer of equipment may 
sell his goods direct to the users or he may reach them 
through distributors who may be either merchants or 
agents. 

Producers of specialized equipment that is built to the 
order of the buyers usually have their own salesmen and 
sell direct to the users. Agents may, however, be used 
as scouts to watch for the building of new plants or the 
re-equipment of old ones. When machines are built to 
the buyer's specifications, it would seem that the order 
would go to the lowest bidder. This is not always the 
case, however, for other factors may be considered. The 
reputation of the seller is important. The salesman may 
help to design the equipment or plant and so may secure 
an advantage. Friendship, promptness of delivery, re- 
pair service, guarantee, credit, and reciprocity are also 
important factors. 

Small equipment that is used in many different trades 
may be sold direct to the users by the manufacturers or 
may be sold through middlemen. If the product is new, 
so that intensive sales effort is required, the manufac- 
turer is likely to do much of the selling. When the 
product is well established, it may be sold by middlemen, 
but even then the manufacturer may have his own sales 
organizations in large markets. In such markets the 
manufacturer often carries stocks and makes immediate 
delivery to users. He often operates service stations to 
repair his products. 

Types of middlemen. There are two types of middle- 
men who handle equipment agents and merchants. 
The manufacturer's agent makes sales on a commission 
basis. He turns his orders over to the manufacturer who 
fills them, and he carries little or no stock and extends no 
credit to the buyers. He generally handles only a few 



Marketing Industrial Goods 225 

products, which may be highly specialized or compli- 
cated. The figures in Table 23 show the business done by 
various types of middlemen handling five kinds of indus- 
trial goods (see pages 226-227). 

There are several types of merchants handling equip- 
ment mill supply houses, machinery dealers, hardware 
jobbers, electrical jobbers, plumbing jobbers, railway 
supply houses, automotive jobbers, steel jobbers, and 
others. These dealers carry goods in stock ; have outside 
salesmen ; and may extend credit, make collections, and 
issue catalogs. Some carry specialized equipment 
adapted only to certain industries, such as metal work- 
ing machinery, wood working equipment, oil well sup- 
plies, railway supplies, or mine supplies. Others handle 
equipment that has a relatively wide use. The hardware 
jobber often carries mechanics' tools, equipment for small 
machine shops, and saw mill supplies. The electrical 
jobber carries many tools and small machines used by 
electrical manufacturers and contractors. 

Supplies. Operating supplies are goods that are used 
up in the operation of the plant but that do not become 
a part of the finished product. Goods with a short life, 
such as typewriter ribbons or electric light bulbs, may 
be classed as supplies, while goods with a relatively long 
life, such as printing presses, are classed as equipment. 

Examples of operating supplies are coal, gasoline, fuel 
oil, lubricating oil, .wrapping paper, twine, and printed 
forms. Some of these products are very important to the 
buyers and are purchased carefully by responsible execu- 
tives. Others are of relatively little importance and are 
bought by an assistant or clerk in the purchasing de- 
partment. 

Coal. Coal is perhaps the most important operating 
supply. It furnishes the power for most of our factories, 



226 



Marketing Industrial Goods 



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Marketing Industrial Goods 

electric and gas plants, mines, railroads, and other public 
utilities, and it heats most of our buildings. The main 
competitive products are natural gas, petroleum, and 
water power. During the past 15 years, the increased 
efficiency of power equipment and the development of 
oil and gas wells and water power have cut deeply into 
the market for coal. Twenty-five years ago, it required 
6 pounds of coal to generate one kilowatt hour of elec- 
tric current. Today it requires less than 2 pounds, and 
some of the best stations use only one pound. 

We produce approximately 500,000,000 tons of bitu- 
minous coal a year. The two largest producing fields 
are: the Appalachian, extending from Pennsylvania to 
Alabama; and the Eastern Interior, in Illinois, Indiana, 
and western Kentucky. Coal is also mined in some ten 
states west of the Mississippi River. There are some 
10,000 bituminous coal mines, with a capacity greatly in 
excess of present demand. Competition is keen and 
prices are often low, and as a result many of the mines 
operate only a part of the time. 

Bituminous coal is used as follows : factories and mills, 
32 per cent; railroads, 28 per cent; coke and gas plants, 
15 per cent; heating homes and other buildings, 10 per 
cent; public utilities, 7 per cent; export, 4 per cent; 
coal mines, 2 per cent; and ships, 2 per cent. Coal is 
used as a raw material for the production of coke, gas, 
coal, tar, ammonia, and other products. It is predicted 
that we will extract our motor fuel from coal when our 
oil supplies are exhausted. This is already being done 
in Germany and England and may be done in this coun- 
try within 20 years. If the demand for coal is to be 
increased, it appears that larger markets as a raw ma- 
terial will have to be found. 

From 75,000,000 to 100,000,000 tons of anthracite coal 



Marketing Industrial Goods 229 

are produced annually in northeastern Pennsylvania. 
Most of it is consumed in the northeastern portion of the 
United States as doniestic fuel. 

Quality of coal. There are many different kinds and 
qualities of coal. Perhaps the most common measure of 
its quality is the amount of heat which it contains. This 
is ordinarily expressed in b.t.u.'s British thermal units 
(a unit is the amount of heat necessary to raise the 
temperature of one pound of water one degree Fahren- 
heit). The buyer may buy the coal that shows the 
lowest cost per b.t.u. delivered at his plant. There are, 
however, other factors to be considered. Transportation 
facilities from the mine are important to insure a steady 
supply. A high ash content is objectionable if the dis- 
posal of ashes is expensive. When traveling grates are 
used, the ash should have a high fusing point so that it 
will not form clinkers and clog the grates. A high vola- 
tile content is desired for making gas, but on the other 
hand, a coal with a high volatile content is bad for 
furnaces with small combustion chambers as the vola- 
tile matter will be incompletely burned and result in 
smoke. Sulphur in the coal is objectionable for making 
coke. Sulphur and a high moisture content are objec- 
tionable when the coal is to be stored in the air. 

From these statements it can be seen that the selection 
of the best coal for one's particular needs is not always 
easy. Large buyers may use the services of fuel engi- 
neers or chemists. Smaller users can employ the serv^ 
ices of outside chemists or research laboratories, or get 
helpful advice from wholesalers. 

Marketing coal. Coal has a low value per ton. The 
cost of transporting it from the mine to the consumer is 
often more than the cost of the coal at the mouth of the 
mine. Some 20 per cent of the bituminous coal is con- 



230 Marketing Industrial Goods 

sumed by large railroads and other companies that own 
their own mines. The other 80 per cent is sold to in- 
dustrial consumers and retail coal dealers by the mine 
operators' salesmen, wholesalers, and brokers. Coal is 
sold for immediate delivery and on contracts for future 
delivery. Mine operators are often willing to accept 
future contracts at prices little more than the cost of 
production, as such contracts assure more or less steady 
operation of their mines. 

Sales methods. The larger mines very often maintain 
their own salesmen to dispose of their output. An opera- 
tor's sales organization may also sell coal produced by 
other mines. 

Wholesalers. Coal wholesalers buy coal to sell at a 
profit. They have title to the coal, but few of them, 
except those receiving it by water, handle it physically. 
It is usually delivered to the buyers by the railroads, 
and selling is the principal function performed. Whole- 
salers claim that they render valuable services to the 
buyers by giving them advice as to the kind of coal they 
should purchase. They are said to handle more than 20 
per cent of the coal. 

Sales agents. Sales agents or brokers sell coal on a 
commission basis for the mines and do not have title to, 
nor handle, the coal. A sales agent commonly repre- 
sents from 10 to 20 mines. The rate of commission 
varies widely but is said to average about 8 per cent. 
Studies made a few years ago showed that selling agents 
sold more than one-half of the anthracite coal and one- 
third of the bituminous coal. The data in Table 23, 
on pages 226 and 227, show that the various types of 
agents handled 40 per cent of all the coal handled by 
middlemen in 1933. 



Marketing Industrial Goods 231 

Raw and partly finished goods. There are several 
types of raw materials: first, those that have come from 
the farm, mine, forest, or ocean and have not been 
changed in any way except that necessary to harvest, 
mine, or catch .them. In this class come such products 
as cotton, wool, grain, livestock, tobacco, broom corn, 
ores, logs, nuts, raw furs, barks, shells, and roots. Second, 
there are products that have gone through one or more 
manufacturing processes but that must be further manu- 
factured before they are ready for consumption. In this 
group are such products as iron, steel, tin, zinc, copper, 
hides, leather, thread, lumber, and crude chemicals. 

Raw materials are often standardized and dealt in on 
exchanges or sold at auction. Often they have market 
prices that are widely published and their sale is often 
made on a basis of price, quality, and delivery. Prices 
fluctuate widely and considerable risk is involved in 
carrying them in stock. When a future market exists, 
the risk of changes in prices can be largely shifted by 
hedging. Raw materials have known prices and can be 
sold quickly, and they are therefore good security for 
loans. Raw materials are subject to less risk from 
obsolescence than most other types of goods; the style 
of the finished product may change, but it is likely to be 
made from the same raw materials. 

Steel. Steel will be used to illustrate the marketing 
of a partly manufactured good. Steel is a finished 
product to the steel mills but is considered a raw ma- 
terial by its buyers. Steel is made from iron, which in 
turn is made from iron ore, coke, and limestone. Most 
of the iron ore is mined near Lake Superior, and most 
of the steel mills are located in the Pittsburgh district in 
western Pennsylvania and eastern Ohio, and along the 



232 Marketing Industrial Goods 

shores of Lake Michigan and Lake Erie. Other impor- 
tant producing areas are near Birmingham, Alabama, 
and along the Atlantic seaboard in Maryland and Penn- 
sylvania. Some steel mills produce crude products, such 
as billets, bars, and plates. Others turn out more nearly 
finished products, such as wire, nails, pipe, shafts, rails, 
tin plate, sheets, and structural steel shapes. Omitting 
scale and scrap, we find that about 96 per cent of the 
steel is rolled and about 4 per cent is made into castings. 
The largest consumers of rolled steel are automobile 
manufacturers, building contractors, railroads and other 
public utilities, manufacturers of machinery, farm im- 
plements, and cars, and operators of oil and gas wells 
and mines. 

The steel mills have a productive capacity that is 
greatly in excess of the demands in normal times. Even 
in busy years like 1929 the mills seldom operate at full 
capacity. Because of the concentration of the business 
in the hands of a few large companies, however, this 
over-capacity does not cause the price fluctuation that 
exists in the bituminous coal industry. 

Marketing methods. Many buyers want steel of a 
definite chemical content, and much steel is made to 
meet their specifications. The mills, however, make 
standard grades of steel which are carried in stock for 
prompt delivery. 

A large amount of steel is sold on future tonnage con- 
tracts, under which the buyers place orders for stated 
quantities to be delivered in future months. They give 
the mills specifications as to the sizes desired in time to 
allow the mills to roll the steel for delivery. These future 
contracts are really options, however, for the buyers 
often cancel them if prices drop. 

Since steel is heavy, freight is an important factor in 



Marketing Industrial Goods 233 

its delivered cost to the buyer. Prices are usually quoted 
to apply at certain basing points. The buyers pay the 
freight from the basing points whether or not the sellers 
are located there. 

Steel mills maintain sales organizations and sell most 
of their output direct to the consumers. Some steel, 
however, is sold by jobbers. 

Steel jobbers. Jobbers sell approximately 10 per cent 
of the steel. They carry goods in stock for immediate 
delivery and are patronized by small users who buy in 
less-than-carlots and by large users who want goods 
quickly. 1 They normally charge somewhat higher prices 
than the mills but must keep the supply and demand 
factors, as well as their costs, in rnind when naming 
prices. 

Fabricated parts. Manufacturers of fabricated parts 
sell to other manufacturers. In order to build markets, 
they often advertise to the consumers of the finished 
products and try to secure consumer demand. It is 
doubtful if they are often successful in securing con- 
sumer insistence. They may, however, secure consumer 
acceptance. By this is meant that the consumer will buy 
the finished product more readily when he knows that 
it contains certain parts which he feels are of high 
quality. This causes the manufacturer of the finished 
product to favor the use of advertised parts. To illus- 



1 One large jobber has 8 warehouses in different parts of the country 
and says that 85 per cent of his orders are filled within 24 hours. An- 
other jobber has a warehouse with a capacity of 30,000 tons. He carries 
bars of various shapes and sizes from which manufacturers forge their 
products. He carries beams, girders, boiler tubes, sheets, cold finished 
steels, electric drills, electric hammers, and grinding machines. He has 
a fabricating department cutting bars and girders into the desired 
lengths and punching and riveting them as desired by the buyers. He 
has a force of salesmen to take orders over the telephone and another 
force to call upon the buyers. 



234 Marketing Industrial Goods 

trate, the washing machine salesman tells the prospec- 
tive purchaser that his machine is equipped with a 
Westinghouse or General Electric motor and so builds 
a feeling of confidence in the quality of his product. 

The manufacturer of parts has a more or less un- 
certain market. As the manufacturers of the finished 
products grow, they tend to produce the various parts 
entering into the make-up of their products. A manu- 
facturer of parts may build a plant to produce goods for 
a large customer and then be unexpectedly notified by 
this customer that he has decided to make his own parts. 
In order to maintain his business, the manufacturer of 
parts should have many customers; he should, if pos- 
sible, sell his goods for use in different industries; and he 
should make several different products. He should con- 
stantly try to improve his products and develop new 
products from time to time. 

Fabricated parts are commonly sold direct to the 
manufacturer of the finished goods by salesmen, but they 
may also be handled by wholesale supply houses. 

Who controls the purchase of industrial goods? The 
purchase of the equipment for a plant is such an impor- 
tant matter that it may be passed upon by the officers, 
directors, or stockholders of a company. However, this 
does not usually mean that they specify the exact goods 
or brands to be bought. The actual choice may be made 
by the company's engineer, plant manager, foreman, 
purchasing agent, or president. 

The purchase of a company's chief raw materials is 
likely to be made by the purchasing agent or by some 
other responsible executive who spends a large part of 
his time studying the goods and trends of prices. A 
tire company, for example, may have one purchasing; 
agent who devotes his entire time to the purchase of 



Marketing Industrial Goods 235 

crude rubber. He thus becomes an expert on rubber 
and may have the help of research departments which 
devote much time to studying the qualities of rubber and 
its price movements. In some companies the purchasing 
agent is a real executive who has considerable authority 
in determining what is to be bought. In other compa- 
nies, he is merely a high-grade clerk placing orders for 
goods requisitioned by the executives. 

Finding the buyer. The seller often has difficulty in 
finding the man or men who actually make the purchase. 
To illustrate, a company may have plants in Texas, an 
engineering office in St. Louis, and a purchasing office 
in New York. The order will actually be placed in New 
York, but the goods may be specified by the plant man- 
agers in Texas and approved by the engineers in St. 
Louis. To illustrate the difficulty involved, a seller re- 
ports losing a sale for which he had worked hard and 
"sold" everyone in the buyer's organization from the 
foreman up to the president. The order, however, was 
placed by the board of directors, which gave the order 
to a large and nationally known company on the basis 
of its general reputation. 

Type of salesmen needed. There is a difference of 
opinion as to whether trained salesmen or technical men 
produce the best results in selling industrial goods. 
Companies using trained salesmen say that selling in- 
dustrial equipment is not fundamentally different from 
selling other goods; that the same principles of psy- 
chology and salesmanship apply; and that a good sales- 
man can acquire the necessary knowledge of the 
products. When necessary he can call upon the com- 
pany's chemists, engineers, or metallurgists, to give 
needed information to prospective customers. Those 
companies using technical men feel that their products 



236 Marketing Industrial Goods 

are so complicated that technical knowledge is necessary 
to explain them to the buyers, who are themselves often 
technical men. When technicians are used, they are 
usually given some training in the principles of sales- 
manship. 

For highly complicated products, such as machines 
that are built to order, trained technical men seem to be 
preferred. For simpler and less complicated products, 
such as steel, expert salesmen appear to give better 
results. 

Chapter 13 
Review Questions 

1. What is meant by industrial goods? How do they dif- 
fer from consumers' goods? 

2. What are the different types of industrial goods? 

3. What can you say of the demand for industrial goods? 

4. What are the different types of equipment? 

5. What determines the value of equipment? 

6. Why is new equipment purchased? 

7. How does the seller of equipment find buyers? 

8. When can the equipment manufacturer advantageously 
advertise in magazines read by the general public? 

9. How is equipment sold? 

10. What functions does the manufacturer's agent perform 
in selling equipment? 

11. What types of merchants sell equipment? What func- 
tions do they perform? 

12. What are operating supplies? 

13. What factors have limited the demand for coal? Who 
are the principal users? 

14. How is coal marketed? 



Marketing Industrial Goods 237 

15. What determines the quality of coal? How can the 
buyer select the proper coal for his needs? 

16. What middlemen market coal? Which are merchants 
and which are functional middlemen? 

17. How does the marketing of raw materials differ from 
the marketing of equipment? 

18. Where is*steel produced? What are its chief uses? 

19. How is steel marketed? 

20. Describe the operations of steel jobbers. What serv- 
ices do they perform? 

21. What problems face the manufacturer of fabricated 
parts? What can you say of the security of his market? 

22. How are fabricated goods sold? 

23. Who controls the purchase of industrial goods? 

24. What is the position of the purchasing agent in buying 
industrial goods? 

25. What type of men should be employed to sell com- 
plicated industrial equipment? To sell small and standard 
appliances? To sell raw materials such as steel? 

Thought Problems 

1. What is meant by reciprocity in buying? 

2. What industrial goods can you find advertised in peri- 
odicals with general circulation? 

3. How would you classify the following goods: plumber 's 
tools; typewriter ribbons; sugar; tin plate; pig iron; lumber; 
machine tools; crude rubber; automobile tires; tin ore; pig 
iron; tin? 

4. What is meant by obsolescence? What is its impor- 
tance in marketing equipment? 

5. Both the coal mining and the steel industries are said 
to be overdeveloped. How does this overdevelopment affect 
the prices of coal and steel? 



238 Marketing Industrial Goods 

6. What place should the purchasing agent of a manu- 
facturing company occupy in the buying of coal? of lubri- 
cating oil? of stationery? of equipment for a new plant? 
of motor trucks? of bookkeeping machines? of automobiles 
for the company's salesmen? 



CHAPTER 14 

Selling Service 

Meaning of service. We spend our money not only for 
goods but also for services. In the past most of the at- 
tention of those interested in distribution has been de- 
voted to the marketing of goods; services, however, are 
also very important to the consumer. If we include 
savings, taxes, and shelter, then services take between 40 
and 50 per cent of our income. We may think of services 
as those things which we buy that are not tangible goods. 
There are many such things. When we buy insurance, 
we receive only a policy; when we buy a ticket to the 
theater, we obtain only the right to see and hear the 
performance; when we visit the barber shop, we carry 
away no goods; and when we pay the laundry bill, we 
receive no new clothes. In all such cases we are buying 
intangible things and not actual goods. 

Kinds of services. There are many kinds of services. 
First, we find various types of personal service. In this 
group come entertainment, such as talking pictures, 
music, and athletic contests; medical advice; laundry 
and pressing service; protection furnished by detective 
agencies, guards, and lawyers; credit information; work 
in making repairs, as on automobiles, watches, and shoes ; 
and so forth. 

Second, there is transportation, the moving of goods 
and persons front one place to another. 

The third type of service includes the group which we 
commonly refer to as "utilities" or "public service" com- 

239 



240 Selling Service 

panies which sell electricity and telephone and telegraph 
communication. Water and gas are generally included 
in this group, although they arc definite commodities. 

Fourth, there is savings. When we save we receive a 
deposit slip from the bank, an insurance policy, a mort- 
gage, a bond, or shares of stock. When we save we post- 
pone the satisfaction of consuming goods or services to a 
later time. 

The fifth type of service includes the rental of lodgings 
and shelter, such as hotel rooms, apartments, and houses. 
We receive the right to use definite physical goods, but 
we do not receive ownership of the buildings. 

And last, we have services provided by the government, 
such as schools, police and fire protection, and streets and 
roads, for which we pay taxes. 

Importance of service. It has been estimated that the 
American people spent in the neighborhood of ten billion 
dollars annually for rent in the years from 1927 to 1931. 
Savings vary with the prosperity of the country but in 
several years have been over ten billion dollars. Per- 
sonal, professional, and public utility services and amuse- 
ments cost another ten billion. The total cost of 
transportation is even larger, but most of it is involved in 
moving goods and is paid for by the consumers in the 
purchase of the finished goods. In the depression year 
of 1933, the sales of hotels, personal service establish- 
ments, and amusements amounted to 2,761 million 
dollars. 

Figures showing the number of establishments, sales, 
and employees for selected service industries, as reported 
by the Census for 1933, are given in Table 24. It should 
be remembered that 1933 was a poor business year. It is 
also possible that the Census enumerators missed some 
establishments. 



Selling Service 



241 



TABLE 24. BUSINESS OF SELECTED SERVICE INDUSTRIES 

IN 1933 
(Census Data) 

Number of Sales Average N urn- 

Estabhsh- (millions) ber Full-Time 

ments Employees* 
Total services (only a part listed 

below) 443,217 $1,725 356,190 

Barbershops 117,832 204 71,347 

Beauty parlors 42,073 117 42,733 

Cleaning & pressing . 55,459 136 28,274 
Funeral directors.. . 12,655 172 16,414 
Hand laundries t . 13,691 37 7,811 
Photographic studios 8,330 32 5,881 
Shoe repair shops . 50,425 87 12,876 
Shoe shine parlors . 7,027 10 2,826 
Credit adjustment & collec- 
tion bureaus .. 1,824 35 11,936 
Advertising' agencies . 1,479 190 11,642 
Trucking . 23,102 175 39,291 
Plumbing and heating repairs 6,608 27 3,447 
Radio repair . . 4,501 6 650 
Watch & jewelry repair 9,678 15 1,302 
Amusements (only a part listed 

below) ' . 29,737 520 87,372 

Pool parlors & bowling alleys 11,438 32 9,016 

Dance halls 2,933 10 2,884 

Motion picture theaters 9,499 356 54,030 
Theaters, legitimate stage, & 

opera 122 9 1,182 
Motion picture & vaudeville 

theaters 644 50 7,924 

Hotels 29,462 516 213,919 

Year 'round 27,128 493 205,570 

Seasonal** 2,334 22 8,349 

TOTAL SERVICES, AMUSE- 
MENTS, & HOTELS 502,416 $2,761 657,481 

*Does not include proprietors, partners, members of their families, and part- 
time employees Total number of proprietors, 546,444. 

fPower laundries included as factories in Census of Manufactures. 
** Figures probably incomplete as many hotels were closed when Census was 
taken. 

Selling services and selling goods. The demand for 
services arises from the same human desires as the de- 
mand for goods. The methods of selling goods and serv- 
ices, however, differ in some respects. Services are often 



242 Selling Service 

sold direct by the producer to the consumer, and middle- 
men are of relatively less importance than in the sale of 
goods. The middlemen used may be either merchants 
who buy and sell in their own right or agents who are 
paid by the seller. Tickets (theater, steamship, baseball) 
are often sold though agents and sometimes by dealers 
(e.g., speculators) ; mortgages, stocks, and bonds are often 
sold through banks and investment houses; and insurance 
policies are distributed through agencies. 

It requires a higher type of salesmanship to sell in- 
tangible services which the buyers cannot see than to sell 
tangible goods. The salesman must appeal to the imagi- 
nation. The insurance salesman cannot show his wares, 
for the buyer receives only a policy which gives him the 
right to receive something at a later time, or protection 
against a contingency which may not happen. The bond 
salesman must persuade his customers to limit present 
spending for the advantages of future spending. 

The salesman for education, entertainment, travel, or 
advice must induce the customer to purchase before he 
knows the quality of service which he receives. The 
quality of past purchases may, however, be an important 
factor with some buyers. In the sale of lodgings, on the 
other hand, the salesman has very definite goods to show 
the buyers, who can see the house, the rooms in the 
apartment, or the furnishings in the hotel. 

Advertising. Advertising is used in the sale of serv- 
ices and is often of greater importance than personal 
salesmanship. Many services are sold in such small units 
that the size of the sale does not justify sending out 
salesmen to hunt for individual customers. It would, for 
example, be rather expensive to employ outside salesmen 
to sell tickets to picture shows. Salesmen, however, are 



Selling Service 243 

often used when the individual sales are of large value, 
as is true of travel tours, bonds, or insurance. 

The great majority of people are prospective buyers 
for many kinds of services. Such services can be adver- 
tised in the newspapers, on billboards, in magazines, by 
radio, and by the use of direct-mail material, such as 
letters and pamphlets. 

Publicity. Publicity has been distinguished from 
advertising by the fact that it is not paid for directly. 
It may be printed or oral and is frequently used in the 
sale of various kinds of service. This is particularly true 
of sports and amusements, which are given much pub- 
licity by the newspapers. Publicity is often used to sell 
such ideas as thrift and health for example, dental and 
medical examinations to the public. 

Selling entertainment. There are many forms of com- 
mercial entertainment theaters, ball games, prize fights, 
musical concerts, circuses, clubs, tours, dance halls, and 
the like. The relatively small size of the individual sale 
(ticket) of most of these amusements limits the use of 
personal salesmen. The sellers often advertise on bill- 
boards, in local newspapers, on theater programs, in hotel 
lobbies, and direct by mail. Some films are advertised 
in magazines with national circulation. Publicity is a 
potent factor in creating demand for many of these ex- 
hibitions. The attendance at ball games or prize fights 
may be largely determined by the publicity on the sports 
pages of the papers, and the attendance at theaters or 
musical performances is influenced by the press reviews 
and notices. People flock to see those pictures which 
their friends tell them are good and avoid those which 
are said to be poor. Sellers want to get people to talk 
favorably about their performances. 



244 Selling Service 

The enjoyment of entertainment depends upon other 
things than the intrinsic quality of the performances 
such, for example, as the weather, the surroundings, and 
the kind of people in the audience. The theaters have 
been among the leaders in cooling their buildings in hot 
weather. Beautiful surroundings likewise help. People 
want change variety is the spice of life. Entertainers 
are constantly on the lookout for new forms of amuse- 
ment or for new settings for old forms. Few factors at- 
tract customers like crowded houses the knowledge that 
all the seats have been sold. 

Selling professional services. Some professions limit 
their members in soliciting business. In such cases, the 
theory seems to be that if the professional man does 
good work, his clients will tell others and his practice 
will grow. This is the basis of the ethics of the legal 
and medical professions, which prohibit personal sales- 
manship and large advertisements. Other groups have 
an entirely different viewpoint. Credit bureaus, for ex- 
ample, employ both salesmen and advertising. Advertis- 
ing agencies believe in advertising and hence advertise 
and employ salesmen to secure clients. Accountants 
frown upon the use of advertising but allow a certain 
amount of personal salesmanship. Statistical organiza- 
tions employ salesmen and advertise. 

Regardless of whether or not the seller of this type of 
service advertises, a considerable portion of his success 
will depend upon how his clients speak of his services. 
Reputations may be established in this way, and reputa- 
tion counts greatly in attracting customers. 

Other personal services. Repair shops, detective 
agencies, laundries, barber shops, beauty parlors, and the 
like, very often advertise, and some organizations employ 



Selling Service 245 

salesmen. They may use advertising novelties, tele- 
phone directories, billboards, electric signs, and direct- 
mail advertising, as well as advertisements in periodicals. 

Selling transportation. To meet competition the rail- 
roads have improved their service, speeded up their 
trains, advertised to the public, tried to make their em- 
ployees courteous and helpful to travelers and shippers, 
and in some cases reduced rates. 

To secure freight traffic, the roads often provide special 
terminal facilities, such as warehouses for storing and 
reshipping merchandise, team tracks, unloading plat- 
forms, heated warehouses and auction rooms, stores 
equipped with refrigerators for butter and egg dealers, 
and elevators for handling grain. Many roads pick up 
and deliver less-than-carloads free. This service is called 
"store-door delivery/' They advertise the frequency of 
service and the promptness of trains. The roads employ 
personal salesmen to solicit business from large shippers. 
The service furnished by the roads in promptly supplying 
empty cars for loading, in picking up loaded cars, in 
spotting cars for unloading, and in settling claims for loss 
and damage, and the speed and regularity in delivering 
goods at destination, are of fundamental importance in 
securing business. 

Some railroads have organized personally conducted 
travel tours. Some serve tea to passengers on their trains. 
Some have provided reserved seats in day coaches. Some 
sell combined rail-and-air, and rail-and-bus, tickets. 
Many have personal salesmen to solicit passenger busi- 
ness, especially sight-seeing and convention parties. The 
railroads advertise the speed and luxury of their pas- 
senger trains, the scenery along their routes, the cleanli- 
ness and safety of their trains, and the excellence of the 



246 Selling Service 

meals in their dining cars. Direct-mail advertising tell- 
ing about the railroad service is sent to members of 
organizations that are holding conventions. 

Buses, trucks, and airplanes may use similar methods 
to obtain customers. Speed or quickness of delivery, 
frequency of service, cleanliness, low cost, and safety 
may be advertised in magazines, on billboards, in news- 
papers, and direct by mail. Publicity and personal sales- 
manship also may be used. Satisfied customers tell 
others and increase traffic. 

Selling electricity. Central station companies pro- 
mote the sale of electricity in many ways. To sell elec- 
tricity to the general public, it is, of course, necessary 
that houses be wired. The number of wired homes is 
therefore increased by advertising electric service, by low 
prices or liberal credit on the cost of wiring, by reduced 
price for electricity, and by extending electric lines. In 
recent years the number of wired houses has been notably 
increased by the building of rural lines which supply the 
farmers with electricity for operating machinery and 
household appliances and for lighting farm buildings. 

After a house is wired, the company may increase the 
sale of current by inducing the consumers to buy more 
electric appliances. Many electric companies promote 
the sale of such electrical appliances as irons, washing 
machines, percolators, fans, mangles, radios, refrigerators, 
toasters, waffle irons, and stoves. They realize that the 
more appliances there are in use, the more current will 
be used. Some companies themselves sell such appliances 
through their own retail stores or by house-to-house 
salesmen. They often advertise such appliances in the 
newspapers and by material enclosed with the monthly 
bills. Some of them give liberal credit terms. 

In order to increase the consumption of electricity by 



Selling Service 247 

merchants, the electric companies may have salesmen and 
lighting experts call upon them and show them how they 
can increase their sales by properly lighted show win- 
dows, display cases, store interiors, and outside electric 
signs. 

Central station^ companies may increase the sale of 
electricity to factories and other industries by reducing 
rates and by convincing such users that they can secure 
more dependable and cheaper power than by generating 
it themselves. Large central stations can usually pro- 
duce power more cheaply than small plants, because of 
the greater efficiency of their equipment. Large users 
may be able to buy power more cheaply than they can 
generate it, because they have to pay only for the power 
used and do not have to maintain large power plants 
which are idle much of the time. The central station 
company can use its equipment more regularly, as the 
peak loads of its customers do not all come at the same 
time. This reduces the overhead cost of each unit of 
current. Concerns that buy their power do not have 
capital invested in power plants, and they do not need 
space for such plants. In expensive city locations, the 
saving in space is an important factor. The central 
station company uses salesmen and direct-mail and busi- 
ness paper advertising to reach industrial buyers. 

Selling gas. Gas was originally used for lighting, but 
with the introduction of electricity, most of this market 
was lost. Gas was next sold for cooking, baking, and 
the operating of industrial furnaces. Electricity is now 
cutting into these markets. In order to maintain and in- 
crease their sales, the gas companies are selling gas for 
other uses domestic water heaters, heating homes, and 
operating refrigerators. In order tc hold the market for 
cooking and industrial furnaces, better types of stoves 



248 Selling Service 

and furnaces are being developed and manufacturers are 
shown the advantages of gas as a fuel. 

Selling telephone and telegraph service. The number 
of telephones has been increased by advertising the sav- 
ing in time made possible by their use. Business men 
are urged to use the telephone for selling, especially for 
out-of-town calls. Long-distance service is sold by show- 
ing the saving in time and by reducing rates for night 
and Sunday calls. People are urged to put more tele- 
phones in their homes and offices, the convenience of 
extensions being emphasized. 

The telegraph companies urge people to use telegrams 
to save time, to secure attention, and to get action. 
Many people consider telegrams as urgent and give them 
prompt attention. The advantage of telegrams for mak- 
ing sales and collections is obvious. Lower night rates 
induce people to send longer messages. Standard tele- 
grams are provided covering many common situations; 
these messages save the time of the senders in writing 
messages and are often delivered at reduced rates. 

Selling thrift. Life insurance companies, savings 
banks, bond houses, and building and loan associations 
try to induce people to save. Life insurance sales have 
increased since insurance has been advocated as a method 
of saving rather than as a protection against death. 
People are told to save so that they can live in comfort 
when they reach the retirement age; so that their de- 
pendents can have an income sufficient to maintain their 
standard of living in case of the death of the breadwin- 
ner; in order to accumulate capital with which to enter 
business; as protection against the proverbial rainy day; 
and to attain a higher standard of living. 

Personal salesmanship is apparently more important in 
the sale of life insurance and bonds than is advertising, 



Selling Service 249 

although various forms of advertising are used. Life in- 
surance companies and bond houses have found that the 
proper selection and training of salesmen greatly increase 
sales. 

The investment of money is based on the confidence of 
the investor in the security purchased. The ordinary 
consumer is incompetent or too busy to properly judge 
the quality of investments, and he therefore prefers to 
buy from a seller in whom he has confidence. The seller 
often acts as an advisor, and his success over a long period 
will depend largely upon the quality of the advice given. 
In order to secure confidence, most advertising of in- 
vestments is conservative. Salesmen should dress con- 
servatively and avoid extreme or exaggerated statements; 
they should have the knowledge, culture, and confidence 
that enables them to meet educated, intelligent, and suc- 
cessful people and to secure their respect and confidence. 

Selling lodgings. There are several types of hotels 
commercial, apartment, resort, and family (residential). 
The sales problems of these various types differ slightly, 
but reputation, location, and appearances are important 
to all. People go to those hotels which they hear are 
good and stay away from those which they hear are 
poor. The hotel, naturally, wants to secure a good repu- 
tation. 

Many commercial and resort hotels owe their existence 
to their location in business centers, near transportation 
facilities, near depots, in particular climates, or near 
natural beauty spots. Location is also important to 
apartment and residential hotels, which should have at- 
tractive locations with good transportation facilities con- 
necting them with the business districts. Garage 
facilities are important to all classes of hotels. 

The hotel can use inside and outside selling. Inside 



250 Selling Service 

selling is done by the employees and by printed notices 
in rooms, elevators, and dining rooms. Courtesy, friend- 
liness, and prompt attention to wants by greeters, clerks, 
porters, waiters, and managers do much to create good- 
will. Notices in the rooms, in the elevators, and on the 
menu cards can be used to call attention to dining rooms, 
laundry and valet service, beauty parlors, libraries, and 
other facilities offered by the hotel. 

Outside selling may be done by advertisements along 
highways, in newspapers, in hotel directories, in trade 
papers, on theater programs, and on advertising novelties. 
Direct-mail advertising may also be used. Mailing lists 
may include professional men, business men, salesmen, 
members or organizations holding their conventions in the 
city, and former guests. Resort hotels may send adver- 
tisements to former guests, to people who are about to 
be married, to school teachers and other professional 
people, to business men, and to society leaders. 

Advertisements may feature food, bedside telephones, 
garage or parking facilities, comfortable beds, attractive 
rooms, convenience of location, valet service, libraries, 
nurseries for children, separate floors for women, or low 
prices. The resort hotel may advertise the beauty of its 
location; its private beach, golf links, or swimming pool; 
or the comfortable weather. 

Personal salesmanship may be used to secure conven- 
tions or parties of tourists. Some large hotels have spe- 
cial departments to secure conventions. 

Apartment hotels may call attention to the fact that 
their guests are relieved of worry over the servant prob- 
lem; to their dining rooms, garages, soundproof walls, 
hand laundries, or beauty parlors ; to the even tempera- 
ture of their rooms; to the type of guests; to the con- 
venience of transportation facilities or business and 



Selling Service 251 

education centers; to the quietness of their location; and 
to the beauty of their buildings. 

The apartment house may call attention to the con- 
venience of its kitchens, its iceless refrigerators, its gar- 
bage incinerators, its soundproof walls, its garage 
facilities, its restaurant, its laundry service, and the fact 
that its tenants are freed from the worry of furnaces and 
cleaning sidewalks. 

Chapter 14 
Review Questions 

1. What is meant by service? 

2. What are the different kinds of services? 

3. How important are the various services to the con- 
sumer? 

4. How does the selling of service differ from the selling 
of goods? 

5. How does the sale of lodgings differ from the sale of 
bonds? 

6. How is advertising used in selling service? 

7. What is meant by publicity? How is it used in selling 
service? 

8. Why do doctors not advertise? 

9. How is entertainment sold? 

10. How is professional service sold? 

11. What is the difference in the way an advertising agency 
sells its service and the way a lawyer sells his service? 

12. How do the railroads sell their services? 

13. How does the sale of passenger service differ from 
the sale of freight service? 

14. How do central station companies promote the sale 
of electricity to domestic users? To stores? To factories? 



252 Selling Service 

15. How do gas companies promote the sale of gas? 

16. How is telephone and telegraph service sold? 

17. How is thrift sold? 

18. How may a commercial hotel advertise its services? 

19. How may a resort hotel advertise its services? 

20. How may an apartment hotel advertise its services? 

Thought Problems 

1. Why do the newspapers give so much free publicity 
to baseball and other sports? Professional sports are operated 
for profit. Is there any more reason why newspapers should 
give free publicity to them than to the department stores, 
hotels, and railroads? 

2. Name services which you have heard advertised over 
the radio; which you have seen advertised in magazines; 
and which you have seen advertised in the newspapers. 

3. Do doctors and lawyers attempt to secure publicity 
without paying for it? 

4. Criticize the selling methods used by the railroads. 

5. The Sunbeam Hotel is located between an important 
automobile highway and a beautiful lake in a resort country. 
In the past it has catered very largely to a transient trade. 
It is an AAA (American Automobile Association) hotel. It 
has a small private beach on the lake, golf links, and tennis 
courts, and boats for fishing are available in the community, 
The highway is relocated so that it runs some four miles 
to the west of the Sunbeam Hotel. The owner of this hotel 
is faced with the problem of changing to a resort business 
and securing tourist trade. Outline a selling plan. 



CHAPTER 15 
Marketing Farm Products 

The nature of farming. Farming is a small-scale 
industry. There are more than six million farms in the 
United States. We have heard much of large-scale farm- 
ing by corporations, but the number of such large farms 
is relatively small. The typical farm is operated by the 
owner or a tenant, with the assistance of his family and 
often a hired man. 

There are several types of farming. There is mixed 
(diversified) farming, especially in the East. Under this 
system the farmer may raise fruits and vegetables; grain; 
cattle, hogs, poultry, or other livestock; and milk or 
cream. There is middle western grain farming, in which 
the principal products sold are wheat, hogs, cattle, corn, 
and oats. There is the plantation of the Cotton Belt, 
operated with the assistance of several colored tenants. 
There is the ranch of the central and mountain states, 
raising cattle or sheep on a large scale. There are the 
fruit and truck farms of California, New York, New 
Jersey, Texas, Florida, and other states; in this type of 
farming, a few acres keep the owner busy. There are 
the dairy farms, especially near our large cities and in 
Wisconsin, Minnesota, Vermont, and New York, where 
the cows require systematic attention and produce a 
regular cash income throughout the year. There are also 
many small farms near cities and towns, operated by 

253 



254 Marketing Farm Products 

people employed in the cities; such farms have increased 
rapidly in number with the use of the automobile. 

With so many types ot farms, averages mean little. 
They do, however / establish the fact that farming is a 
small-scale industry. The average farm consists of 145 
acres, of which an average of 56 acres is in cultivation 
and 64 acres in pasture.' 

One-crop versus mixed farming. Some farmers are 
interested in producing only one product for the market 
for instance, cotton, milk, corn, hogs, wheat, cattle, 
oranges, or tobacco. This is known as one-crop farming. 
If the season is good and the price is high, the one-crop 
farmer may be prosperous. It, on the other hand, the 
season is poor or the price is low, he may be very poor. 

Some farmers produce many products for the market, 
not wishing to "carry all their eggs in one basket." This 
is known as mixed farming. If one crop fails, another 
may be good ; if the price ot one crop is low, the price of 
another may be high. The man engaged in mixed, or 
diversified, farming ma> work more days per year than 
the one-crop farmer, but over a period of years he seems 
to be more prosperous. 

Farm income. We have often considered the years 
1923 to 1929 as normal good years in our economic life 
The years 1930 to 1933 were poor years, and especially 
so for farmers. In Table 25 figures for farm income are 
presented for 1929, which may be taken as a more or less 
normal year, and for 1933, a very poor year. 

The farmers' net income declined 54 per cent between 
1929 and 1933. The largest relative declines in income 
came in grain and in cattle, hogs, and sheep. The small- 



1 The remainder is in woodland or other unimproved land, or is 
fallow. 



Marketing Farm Products 255 

TABLE 25. FARM INCOME FOR 1929 AND 1933 

(Figures in Millions) 

1929 19SS 
Income from crops: 

Grains $1,297 $ 506 

Fruits and nuts 707 376 

Vegetables 1,130 747 

Sugar crops (cane and beets) 83 81 

Cotton (including seed) 1,389 684 

Tobacco 286 179 

Other crops 542 301 

Total crops $5,434 $2,874 

Income from livestock: 

Cattle, hogs, and sheep $2,805 $1,186 

Dairy products 2,323 1,263 

Poultry and eggs 1,241 560 

Wool 99 75 

Other 39 27 

Total livestock $6,507 $3,111 

Total income from crops & livestock $11,941 $5,985 

Rental & benefit payments by government . . ^^^^ 271 

Gross income $11,941 $6,256 

Expenditures: 

Operating expenses (e.g., equipment, feed, 

fertilizer, ginning cotton, etc.) 1,972 1,088 

Depreciation of equipment and buildings. . 912 762 

Wages, interest, rent, and taxes 3,402 1,779 

Total expenses $6,286 $3,629 

NET INCOME $5,655 $2,627 



est relative declines came in sugar, wool, vegetables, and 
tobacco. 

The average gross income per farm was approximately 
$1,900 in 1929, and $995 in 1933. The average net in- 
come per farm was $900 in 1929, and $420 in 1933. 

Concentration and dispersion. Farm products are 
produced on millions of farms scattered over wide areas, 
and are often manufactured into food, clothing, or other 
products before reaching the final consumers. The prod- 



256 Marketing Farm Products 

ucts of the factories which manufacture these goods, 
and the farm products which are ready for consumption 
without manufacture, must be dispersed to supply the 
needs of more than a hundred million consumers. 

Farm products as raw materials. It has been esti- 
mated that approximately three-fourths of the farm 
products must be manufactured before they are con- 
sumed. Cotton must be spun into thread and woven into 
cloth; cattle, hogs, and sheep must be made into meat; 
and wheat must be made into flour, and often into bread, 
before reaching the consumer. Wool, flax, corn, tobacco, 
sugar cane, sugar beets, rubber, and broom corn are other 
products that must be manufactured before reaching the 
consumer. 

On the other hand, some farm products, including fresh 
fruits and vegetables, milk, farm butter, farm cured 
meats, honey, and nuts, are ready for consumption when 
they leave the farm. 

Farm products as consumption goods. Most farm 
products eventually become consumption goods food, 
clothing, house furnishings, automobile tires, and the like. 
A relatively small portion of the farm products are finally 
consumed as industrial goods. 

Marketing methods. There are three common mar- 
keting methods by which farm products reach the mar- 
ket: first, sale for local consumption; second, shipment 
by truck to nearby markets; and third, shipment by rail, 
trutfk, or water to distant markets. Sale for local con- 
sumption is important in the sale of fruits, vegetables, 
milk, eggs, and poultry. Shipments by truck have grown 
very rapidly during the past decade, but the greatest 
quantity of goods are still moved by rail. 

Farm products sold for local consumption. Many 
farmers sell their products for local consumption. In 



Marketing Farm Products 257 

this case assembling is relatively unimportant. The 
farmer may sell direct to the consumer by peddling from 
door to door, by selling in farmers' retail markets, by 
shipping by parcel post, or by establishing roadside mar- 
kets and selling to consumers who pass in their auto- 




Courtesy U. S. Dcpt. Agriculture. 



Fig. 20. A farmers' market in a large city. In some markets 
the farmers sell fruits and vegetables to both dealers and consumers. 
In other cities there are separate wholesale and retail markets. When 
the farmers sell direct to the consumers, no middlemen are involved. 

mobiles. To save the time necessary in selling to the 
consumers, the farmer often sells to local retailers; this 
practice is common in many towns for such products as 
milk, eggs, chickens, butter, vegetables, and fruits. In 
some cases the farmers sell to local jobbers who sell to 
the retailers. 

Shipment by truck. The motor truck has attained 
great importance in moving fruits, vegetables, poultry, 
eggs, cotton, tobacco, milk, and livestock. Butter and 



258 Marketing Farm Products 

grain are also moved by truck. Farm products arfe 
moved regularly for distances up to 200 miles, and longer 
distances are not unusual. Some districts ship most of 
their livestock, fruits, and vegetables by trucks. The 
truck often moves goods directly from producing sections 
to consuming areas and thus eliminates the necessity for 
goods passing through central distributing markets. The 
truckman sometimes acts as a merchant, buying the 
goods from farmers or from local buyers, hauling them to 
a city, and selling them in an attempt to make a profit. 
More often the truckman acts as a carrier and is paid 
by either the farmer or the buyer. City wholesalers 
often send their trucks into the country to buy goods 
from farmers and local buyers. In the city the truck- 
man may sell his goods to wholesalers or to retailers, or, 
if he does not own the goods, he may deliver them to 
commission merchants to be sold for the account of the 
shippers. The truckman may occasionally sell to the 
consumers, but this method is usually too slow to be 
profitable, except for those using light trucks. 

Rail shipment. A very large proportion of farm prod- 
ucts are shipped by rail, local buyers usually buying, 
assembling, and loading the goods into the cars. At 
times, goods pass through the hands of two middlemen 
in the country the local buyer and the carlot shipper. 
The shippers consign the goods to commission merchants, 
have them sold by brokers, or sell to wholesale buyers. 
City wholesalers often send representatives out to con- 
tact country shippers and make purchases or arrange- 
ments for regular shipments. Sometimes connections are 
made by telegraph or mail. Sometimes the city whole- 
salers buy direct from the farmers. In the central mar- 
kets the receivers of farm products sell them to 
wholesalers, jobbers, manufacturers, exporters, or in- 



Marketing Farm Products 259 

tegrated retailers; or they sell to brokers who purchase 
for such buyers. 

The supply of farm products. The production of 
many farm products varies widely from year to year 
because of differences in the weather and in the acreage 
planted. The weather is perhaps the biggest single fac- 
tor in determining the supply of a given crop produced 
in a given year. A prolonged drouth may reduce the 
yield, and an untimely frost may ruin a crop ; yet a good 
growing season with plenty of rain may mean a bumper 
crop. Other important factors that affect the supply 
are the number of acres planted and the number of 
livestock bred. 

During a ten-year period, the wheat crop varied from 
676 to 968 million bushels; the cotton crop varied from 
8 to 18 million bales; and the potato crop varied from 
323 to 453 million bushels. During the same period, the 
number of hogs on farms varied from 54 to 71 million, 
and the number of beef cattle, from 26 to 36 million. 

The demand for farm products. The demand for 
farm products is relatively steady. Farm products are 
used chiefly as food and clothing, the demand for which 
varies relatively little from year to year. 2 

Prices of farm products. The supply of farm prod- 
ucts varies widely, while the demand for them is 
relatively steady. The variation in supply causes great 
changes in prices, but the demand does not usually 
change very greatly with the fluctuation in prices. In 

2 We need about the same amount of food every day. When prices 
are high or our incomes are low, we do economize to some extent by 
eating cheaper foods. A family that has been eating beef may sub- 
stitute pork, while a family that has been eating pork may eat more 
bread. There is more of this shifting in Europe than in the United 
States, owing to lower incomes in Europe. Changes in European 
demand at times have influenced the prices of American farm products 
more than the changes in the United States. 



260 Marketing Farm Products 

order to stabilize prices, it would be necessary to control 
the supply. 

Control of supply. The farmers do not always reduce 
the supply of farm products when prices drop; in fact, 
.when prices drop, some of them increase their acreage 
in an attempt to maintain their incomes. On the other 
hand, farmers usually increase production when prices 
rise. The cultivated acreage in the United States in- 
creased with high prices from 311 million acres in 1909 
to 376 million in 1919. Prices broke sharply in 1920. 
In spite of the lower prices, the acreage fell to only 357 
million in 1926, and remained near that figure for several 
years. This was a decrease of 19 million acres. Trucks, 
tractors, and automobiles were substituted in large 
numbers for horses. Such machines do not consume 
farm products as 'do horses. It is estimated that these 
changes eliminated the demand for the products of about 
thirty million acres. Scientific farming also increased 
the yield per acre in some instances. 

Several reasons for the failure of farmers to reduce 
production may be mentioned. Many of the farmer's 
expenses are fixed for example, taxes; interest on mort- 
gages; and depreciation of buildings, fences, and equip- 
ment. Such expenses go on whether production is 
curtailed or not. The farmer's cash income is generally 
higher than the expenses which he could avoid by re- 
ducing production; therefore he has little incentive to 
decrease acreage. Finally, if the farmer tries to solve 
the problem by leaving the farm, his investment may 
be lost unless he is able to sell it. Farming is a method 
of making a living, and even if the farmer does not re- 
ceive much cash, he has his food and a house to live in. 
He is hopeful that the next season will bring higher 
prices, a larger crop, or both- 



Marketing Farm Products 261 

Shifting production. It has been suggested that when 
the price of one crop is low, the farmer should shift pro- 
duction to more profitable crops. According to this view, 
a farmer should not stick to one crop, nor should he 
adhere rigidly to a definite rotation of crops on all of 
his land. 

At present some such shifting is done. The acreage 
of potatoes, cabbage, cotton, and flax does vary consid- 
erably from one year to another. In most cases, how- 
ever, acreage is changed in response to the price at or 
before the planting season and not according to expected 
future prices. Thus, if the price of cotton is high during 
January and February, the acreage is increased often so 
greatly increased that the price of the next crop is low. 
Such changes defeat themselves. To make his operations 
profitable, the farmer should shift his production in ac- 
cordance with probable future prices. 

Forecasting prices. In order to shift production 
wisely, the farmer should forecast prices, which means 
that he must predict supply, since demand is fairly 
constant. Future supply depends upon the amount car- 
ried over from previous years, the weather, and the acre- 
age. Can the weather and the acreage that will be 
planted be foretold? According to some, the weather 
runs in predictable cycles; as yet, however, weather cy- 
cles are too little understood to be of a great deal of use 
to the average farmer. The government issues reports, 
or estimates, of intended plantings (acreages) for certain 
crops. These reports may be useful to those planting 
late in the season, who can decrease or increase their 
acreages accordingly. 

It has been observed that the production of some prod- 
ucts runs in more or less well-defined cycles. There is 
said to be a 2-year cycle in cabbage and cotton, a 4- to 



262 Marketing Farm Products 

6-year cycle in hogs, and a 6- to 10-year cycle in beef 
cattle. To the extent that such cycles hold true to past 
performance, the individual farmer can forecast future 
supply with some assurance. 

Production cycles. Production cycles appear to be 
caused by variations in supply and price. One year there 
is a large cabbage crop; the price drops to an unprofitable 
level, and the farmers plant fewer cabbages the next 
year. This smaller acreage reduces the yield and raises 
the price, so that the next year the farmers increase the 
acreage of cabbage. 

When hogs are plentiful, the price drops. It is more 
profitable for the farmers to sell their corn than to feed 
it to hogs. They therefore raise fewer pigs. Within a 
year and a half or two years, there are fewer hogs on the 
market, and prices rise; this higher price causes farmers 
to increase the number of pigs raised. The farmer who 
studies the price trends and the supply factors and acts 
accordingly has many hogs to sell when prices are high 
and few hogs to sell when prices are low. The farmer 
who bases his operations on present prices has most hogs 
to sell when prices are low and fewest hogs to sell when 
prices are high. A middle course is followed by some 
farmers who raise about the same number of hogs each 
year regardless of the price. 

The idea of forecasting prices can be illustrated by an 
old story of a farmer who got rich by planting the crops 
with low prices. If the prices of potatoes and cabbages 
were low, he would increase his acreage of these crops 
and pass by or reduce his acreages of the crops with high 
prices. This man based his actions on the belief that 
other farmers would do the opposite. This is a good 
policy as long as the majority of farmers act as expected; 
but as soon as the mass of the farmers come to follow the 



Marketing Farm Products 263 

policy of this man, a different method of forecasting 
prices will be necessary. 

The cooperative marketing of farm products. In 
order to raise the prices received for products and lower 
the prices of supplies bought, the farmers have organized 
cooperative marketing associations. These associations 
are based upon joint action on the part of their members 
for the purpose of selling their products or of buying 
supplies. 

There are nearly 11,000 of these organizations with 
over three million members. 3 Their annual business in 
1933-34 was estimated at 1,365 million dollars. Nearly 
one-fifth of all the products sold by the farmers pass 
through the hands of cooperative associations, and more 
than four-fifths of the total business of the cooperatives 
consists of the sale of dairy products, grain, fruits and 
vegetables, livestock, and cotton. 

The basic principles of a cooperative organization are 
democratic control, a limitation of interest paid on cap- 
ital to a fair rate, and the distribution of profits to the 
members on the basis of the volume of business furnished 
by each. This latter principle is known as patronage 
dividends. If an organization handles 10,000 bushels of 
a product and makes a profit of $1,000, it could pay a 
patronage dividend of ten cents a bushel. If John Smith 
delivers 1,000 bushels to the association, while Henry 
Brown delivers 500 bushels, John Smith would receive 
a patronage dividend of $100, while Henry Brown would 
receive $50. 

Types of cooperatives. Of the several types of coop- 
erative associations, the two most important types, for 



3 As one farmer may belong to more than one association, these three 
million members represent a considerably smaller number of farmers 



264 Marketing Farm Products 

our purposes, are small, local associations and large, 
national or regional associations. The small, local as- 
sociation ordinarily operates at one country shipping 
point or at a few nearby shipping points. The large 
association covers a large territory. It may handle goods 
at many shipping points and have its own organization 
to handle goods in the central markets. The large or- 
ganization may be a federation of a number of small as- 
sociations, or it may be a centralized organization setting 
up whatever shipping facilities it thinks necessary at 
local points. 

Objects of cooperatives. The objects of farmers' 
cooperatives are to reduce marketing costs; to increase 
demand; and to stabilize prices, in order to increase the 
prices received by the farmers. 

Reducing marketing cost. The cooperative associa- 
tion attempts to reduce marketing costs by increased 
efficiency, by eliminating the profits of the private mid- 
dlemen, and by reducing the duplication in marketing 
machinery. When efficiently managed, cooperatives 
often return worthwhile benefits to their members. If 
not efficiently managed, they are often able to pay no 
higher prices than competing private middlemen and 
are often forced out of business. Two cooperatives sel- 
dom compete at the same shipping point, which often 
means that the cooperative (elevator or creamery, for 
example) secures a larger volume of business than do the 
competing private shippers. The large volume may 
therefore enable it to operate at a lower unit cost. Un- 
less it is less efficiently operated, it can secure for its 
members the profits of the private middlemen. 

The local association assembles the farmers' products, 
ships them to central markets, and often grades and 
packs the products handled. The association in the 



Marketing Farm Products 265 

sentral market receives goods from the country and sells 
them for the local associations. 

Pooling. The cooperative association often pools the 
Farmers' products, by which is meant that all goods of the 
game quality received during a given period are handled 
as one lot. The same price is paid for all goods in a pool, 
although they may be sold at different times and prices. 
The farmer receives the average price realized on the 
sale of all the goods in the pool, less operating expenses. 
Thus the individual farmer does not suffer as the result 
3f poor luck in selling his own goods in a poor market or 
3n a poor day; neither does he benefit from good luck 
in selling them in a good market or on a good day. 

Increasing demand. Many cooperative associations 
try to increase demand by advertising, by improving the 
quality of their products, and by having all markets sup- 
plied regularly. 

Stabilizing prices. Prices may be stabilized by keep- 
ing all markets regularly supplied. This is called feed- 
ing the market. Goods need to be distributed both at 
the right place and at the right time. The association 
tries to distribute goods so that all markets are evenly 
supplied. Goods should be so distributed that both gluts 
(over-supplies) and famines are avoided. 

Monopoly prices. The farmers may secure higher 
prices as a result of efficiently managed cooperative or- 
ganizations; but it must be remembered that if prices 
are raised to profitable levels, the majority of farmers 
will increase their production (unless prevented from 
doing so in some artificial way). This increased supply 
will lower prices. 

The farmers have at times tried to secure monopoly 
prices. In order to secure monopoly prices, it is neces- 
sary to control the supply. The farmers have attempted 



266 



Marketing Farm Products 



to control the supply through cooperative associations, 
but so far they have been unable to control supply ex- 
cept for short periods. When the price is raised, pro- 
duction increases. It appears that the farmers are unable 
to control supply permanently through cooperative as- 
sociations and hence are unable to secure permanent 
monopoly prices. 



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1910 1912 1914 1916 1918 1930 1932 1924 1926 1928 1930 1932 1934 1936 

Fig. 21. Prices of farm products and of products purchased 
by farmers. (1923-25 = 100) 

Prices paid and received. The farmer's welfare 
depends almost as much upon the prices which he has 
to pay for the things he buys as upon the prices of the 
things he sells. Much has been heard about the suf- 
fering of the farmers resulting from the low prices of 
farm products. It would be just as accurate to say that 
they suffered from the high prices of the things they 
bought. If we take the years 1923 to 1925 as a base 
period a period when average conditions prevailed 
we find that the farmers were relatively well off from 
1900 to 1920, and relatively badly off in 1921, 1922, and 
from 1930 to 1933. See Figures 21 and 22. 



Marketing Farm Products 



267 



Farm relief. The farmers largely produce raw mate- 
rials. When prices change rapidly, it has been observed 
that the prices of raw materials go up and down ahead 
of other prices. The price x situation was favorable to 
farmers for the 20 years prior to 1920, but in 1920 prices 
dropped sharply. The prices of farm products dropped 
faster and more than the prices of the things they pur- 



160 



140 



Farm income \ ' 
(Value of farm marketings) 



Money income of industrial workers 
(R.R., factory.and construction) 




1919 70 71 72 73 7^ 75 76 77 78 79 '30 *3I '32 33 

Fig. 22. Farm income and income of industrial workers, 

1919-1933. 
(Bureau of Agricultural Economics) 

chased, causing hard times on the farms and leading to 
various governmental plans to help the farms which 
were commonly called farm relief. 

Early forms of relief. One of the first of plans for 
helping the farmers was to loan them money to carry 
them over until prices rose. This plan was based on the 
idea that prices would soon go up. The trouble with all 
of the relief plans tried between 1920 and 1932 was that 



268 Marketing Farm Products 

they were based on the belief that farm prices were only 
temporarily low, and that if the farmers could be tided 
over for a year or two prices would right themselves. 
We should have realized that the supply of farm prod- 
ucts had been increased as a result of the relatively high 
prices of farm products during the two previous decades, 
and particularly the war period. Also, the demand for 
farm products as horse feed was decreased as a result 
of the displacement of horses by automobiles, trucks, 
and tractors. Farm relief perhaps kept the farmers from 
reducing production as fast as they otherwise would have 
done, and the large production helped to hold prices 
down. We might say that prices of farm products were 
not too low, but that the prices of the things the farmers 
bought were too high. The farmers would have been 
helped more if we had brought these prices down by 
lowering our tariffs and by enforcing our anti-trust laws. 
We did neither but, instead, loaned the farmer money. 
This only got him deeper into debt, and farm mortages 
increased from 7,858 million dollars in 1920 to 9,361 mil- 
lion dollars in 1925. 

It was also argued that farm prices were low because 
of high marketing costs. To reduce marketing costs, 
the government spent money in helping organize co- 
operative marketing associations. 

Tariffs. The farmers were told that the manufacturer 
was prosperous because of high tariffs, and that they 
should have the same protection. Import tariffs on farm 
products were therefore raised. It is well known that a 
tariff cannot raise the prices of goods that are exported ; 
the prices of such goods depend upon the prices in the 
countries in which they are sold. The enactment of 
tariffs on foreign farm products was thus largely a "ges- 
ture" to show goodwill toward the farmers. Many have 



Marketing Farm Products 269 

argued that these tariffs led foreign countries to retaliate 
by raising their tariffs against our farm products and so 
actually injured the farmers. Whether this is true or 
not; the wave of nationalism that swept over much of 
the world led many countries to try to raise their own 
foods and raw materials. To do this they raised their 
import tariffs and in many cases paid subsidies to their 
own farmers, thereby causing a marked decrease in de- 
mand from Western Europe for our farm products. 
This decreased demand has been one of the principle 
causes of the low prices of farm products in the United 
States. 

Farm Board. Next, in 1929, the Farm Board was 
organized to buy up the surplus farm products and hold 
them off the market until prices improved. The Board 
also tried to develop new foreign markets for our surplus 
farm crops. The purchases by the Board probably re- 
tarded the rate at which prices dropped in 1930 and 
1931; it could not, however, stop the decline. It was 
finally discontinued, after costing the taxpayers many 
millions of dollars, most of which was in effect taken 
from the taxpayers and given to the farmers. It was 
soon evident that purchases by the Board would not 
raise prices and that if prices were to be raised, the 
farmers must reduce production. The Board spent con- 
siderable time urging the farmers to reduce acreage, but 
without noticeable results. 

Subsidy. An import tariff cannot raise the prices of 
goods that are exported. Many people have felt that it 
was very unfair for the farmer to sell his crops at world 
prices and then buy goods for his own use (that is, manu- 
factured goods of various types) at prices which are 
above prices in other countries because of a protective 
tariff. The simplest method of removing this inequality 



270 Marketing Farm Products 

would be to reduce the tariff on manufactured products. 
This plan, however, was not seriously considered. In- 
stead, various plans were proposed for raising prices of 
farm products so as to give the farmer the benefit of the 
tariff. The simplest way of doing this would be by a 
direct subsidy. A government-controlled corporation 
could be established which would offer to buy all of a 
given product at the desired price. If we wanted the 
price of wheat to be $1 a bushel, this corporation would 
offer to buy wheat at $1. The price would immediately 
become $1, for no one would sell wheat for less than the 
price the government corporation would pay for it. If 
we raised 800,000,000 bushels of wheat and needed only 
650,000,000 bushels for home use, the corporation would 
buy and export the extra 150,000,000 bushels in foreign 
countries at the prices existing there. If it received 60 
cents a bushel for the wheat exported, the result would 
be a loss of 40^ a bushel, or a total of $60,000,000 on 
the 150,000,000 bushels exported a loss which would be 
borne by the taxpayers. 

Such a subsidy would be a relatively simple and ef- 
fective method of raising prices. The difficulty would be 
that with higher prices the farmers would increase pro- 
duction; therefore a heavier and heavier burden would 
be placed on the taxpayers. For this reason, this type 
of subsidy was not tried. If such a plan were introduced 
to meet an emergency, there is danger that the farmers 
would use all their political influence to prevent its re- 
moval once the emergency had passed and that it would 
have to be applied to all farm products. 

Debenture plan. The "debenture" plan was also 
widely discussed. This is a plan for a subsidy, the cost 
of which would be charged to the farmers and not to the 
taxpayers. The loss on goods exported would be charged 



Marketing Farm Products 271 

back to the farmers as a reduction in the price received 
for goods sold for domestic consumption. The greater 
the loss on exports, the greater the charge against the 
products used at home and the lower would be the net 
price to the farmer. It was argued, for this reason, that 
the plan would not increase production as would a direct 
subsidy. It appears that a very complicated organization 
would be required for the operation of the debenture 
plan. 

Domestic allotment plan. It was evident that a plan 
to raise prices should involve a plan for reducing pro- 
duction, or at least for preventing an increase in produc- 
tion. To meet this requirement, the domestic allotment 
plan was proposed. Under this plan, producers of basic 
agricultural commodities 4 would be paid for reducing 
their acreage. The idea was to reduce production suf- 
ficiently to raise the prices enough to equal the tariff 
42^ a bushel on wheat, 5^ a pound on cotton, 2^ a pound 
on hogs, 5^ a pound on tobacco, and ^ a pound on rice. 
This plan was enacted into a law known as the Agri- 
cultural Adjustment Act (AAA) on May 12, 1933. 
Benefit payments to the farmers under this Act were 271 
million dollars in 1933, about 600 million dollars in 
1934, and nearly 500 million dollars, in 1935. 

Corn-hog contracts. The method of applying the 
Agricultural Adjustment Act may be illustrated by the 
1935 corn-hog contracts. If the farmer agreed to reduce 
his corn acreage from 10 to 30 per cent under his average 
in 1932 and 1933, he was paid 35^ a bushel for the 
average yield of the land so retired from cultivation. 
If he reduced the number of hogs raised for the market 

4 In 1935 the following were set by the government as basic com- 
modities: corn, wheat, rye, potatoes, rice, sugar beets, sugar cane 
syrup, peanuts, tobacco, and hogs. 



272 Marketing Farm Products 

by 10 per cent of the number raised in 1932 and 1933, he 
received $15 for 10 per cent of the average number of 
hogs raised in these years. As popularly expressed, he 
received $15 for each hog he did not raise but only up 
to the specified percentage of his average production. 

Who pays the tax? The money with which to pay the 
farmers was raised by a processing tax collected from 
processors and handlers of farm products. These taxes 
were intended to be passed along to the consumers in 
the form of higher prices, and the consumers not the 
taxpayers or farmers were expected to pay the farmers 
for reducing production. It is generally supposed that 
a tax on output or sales is added to the price by the 
manufacturer or merchant and passed on to the con- 
sumer; but unless the purchasing power of the consumer 
is increased, the higher prices reduce his purchases some- 
what, so that a part of the tax is forced back on the 
producer. When the AAA processing tax was imposed 
on hogs, prices dropped and the farmer felt that he was 
paying the tax; but after the drouth of 1934, prices 
rose and the consumer then felt that he was paying the 
tax. When the processing tax was declared unconsti- 
tutional in January 1936, the prices of corn and wheat 
declined slightly; the price of hogs increased by almost 
one-third the amount of the tax; and the price of spot 
cotton increased slightly, while the price for the new crop 
of cotton declined in anticipation of a larger crop. These 
movements might be interpreted to mean that the con- 
sumers had been paying all the tax on bread, nearly all 
of it on cotton, and two-thirds of it on pork. 

Benefits of the AAA. There was much controversy 
over the effects and benefits of the Agricultural Adjust- 
ment Act. Much may be said for the argument that the 
best way to help the farmer would be to reduce the 



Marketing Farm Products 27 

general price level, for this would help the farmer by 
reducing the prices of the things he buys and would keep 
the prices of farm products in line with world prices sc 
that our surplus could be exported. On the other hand 
many argue that our export markets are gone and thai 
we must permanently reduce our production to domestic 
requirements. It will be exceedingly difficult to reduce 
the production on some crops to domestic needs. For 
example, we have been exporting about one-half of our 
cotton crop; if production is reduced one-half, what will 
become of all the displaced labor? The high price oi 
cotton under the AAA caused other countries to increase 
their cotton crops and so made it harder to export Ameri- 
can cotton. 

Many feel that it is absolutely wrong and opposed 
to the course of nature and economics to reduce produc- 
tion artificially that we cannot become prosperous by 
producing less. Many feel that any plan for acreage 
reduction will fail, for, if the farmer reduces his acreage, 
he will cultivate the remaining acres more intensively, 
He may also plant the abandoned acres in other crops, 
the increased supply of which will cause low prices for 
them. To prevent these difficulties, all products will 
have to be brought under control; and control of such 
matters would involve so much enforcement machinery 
that the plan would be likely to break down under its 
own weight. 

Many argue that it is fundamentally wrong to place 
the burden on the consumer, that it is absolutely un- 
ethical to tax one group for the exclusive benefit of 
another group, and that if the plan is necessary, those 
benefited should pay the cost. Others argue that the 
plan was justified as an emergency measure, but that 
it should have been discontinued when the drouth of 



274 Marketing Farm Products 

1934 removed the surplus. The trouble with such emer- 
gency relief measures is that those benefited do not want 
them discontinued. 

Do we need permanent control of agricultural output? 
Some people feel that some plan of permanent 
control of agricultural output is desirable. They believe 
that a large part of our export market for grain and 
livestock has been definitely lost and that we must 
curtail production of these products until our own popu- 
lation increases sufficiently to require more food. From 
this time, they argue, the problem will be to increase 
output or to shift production from less profitable to more 
profitable areas. We have already seen that higher prices 
will quickly stimulate output. It may bring land into 
cultivation that should be left in grass or forests. 5 For 
these reasons, the case for a permanent control of agri- 
cultural production rests largely on the desirability of 
moving farmers from poorer land to better land and of 
placing the poorer land in forests and grass. 

It has been estimated that since the World War the 
substitution of trucks, tractors, and automobiles for 
horses has deprived the farmers of a market for the 
output of 30 million acres of land formerly used to raise 
horse feed, and that lost export markets have deprived 
them of the markets for the output of almost 30 million 
additional acres. Yet, the increase in the population 
since the World War has absorbed the output of 30 
million acres, so that the excess of land in cultivation 
over that actually needed for domestic requirements and 
remaining export market is now only 30 million acres, 

5 For example, it is said that the high price of wheat during the 
World War led to plowing up much grazing land in the Great Plains 
and that this has been largely responsible for the great dust storms 
in recent years. 



Marketing Farm Products 275 

or an area equal to that formerly used to raise crops for 
our lost export markets. It is argued that the farmers 
should be paid to keep this acreage out of cultivation 
until the population increases sufficiently (by some 10 
million persons) to absorb the product. It has been 
estimated that our population will become stationary at 
about 150,000,000 within the next 35 years. If this 
turns out to be a correct forecast, we shall need to expand 
our present acreage of cultivated land by 30 to 40 million 
acres in order to feed and clothe our population at the 
present standard of living. 

Chapter 15 
Review Questions 

1. What is the nature of farming? 

2. What is the average size of farms in the United States? 

3. What are the different types of farming in the United 
States? 

4. What is one-crop farming? 

5. What is mixed farming? 

6. What are the advantages and disadvantages of mixed 
farming as compared with one-crop, or specialized, farming? 

7. Why must farm products be concentrated for the 
market? 

8. How are farm products marketed for local consump- 
tion? 

9. What farm products are ready for consumption as they 
leave the farm, and what products must be manufactured 
before they reach the consumer? 

10. Are most farm products finally used as consumers' 
goods or as industrial goods? 

11. What determines the supply of farm products? 



276 Marketing Farm Products 

12. What determines the demand for farm products? 

13. Which is the more steady (inelastic), the supply of or 
demand for farm products? 

14. What factors determine the prices of farm products? 

15. Why do not the farmers reduce supply more promptly 
when prices decline? 

16. What is meant by shifting production to more profit- 
able crops? 

17. Can the farmer forecast future prices? If so, how? 
If not, why? 

18. What is meant by cycles of production? What causes 
such cycles? 

19. What are cooperative marketing organizations? 

20. What can you say of the importance of the cooperative 
marketing of farm products in the United States? 

21. What are the principles of cooperative organizations? 

22. What are the types of cooperative organizations? 

23. What are the objects of cooperative marketing among 
farmers? 

24. How do cooperatives attempt to reduce marketing 
costs? 

25. What is meant by pooling? 

26. How do cooperatives attempt to increase the demand 
for their products? 

27. How do the cooperatives attempt to stabilize prices? 

28. What is meant by orderly marketing? 

29. What is necessary in order to secure a monopoly price? 

30. Have the farmers been able to secure monopoly prices? 

31. What is meant by farm relief? 

32. Name the plans tried by the Government for helping 
the farmers since 1921. 

33. What plan did the Farm Board follow? 



Marketing Farm Products 277 

34. What was the plan of the AAA? 

35. How did it work? 

36. How would a direct subsidy operate? What would be 
its advantages and disadvantages as contrasted with the 
domestic allotment plan? 

37. What do you think of the advisability of having the 
government permanently try to control the price of farm 
products? 

Thought Problems 

1. Why is farming a small-scale industry? Much is being 
said today about large-scale farming. It is said that the 
tractor will enable the farms to be operated on factory 
principles owned by corporations and worked by hired 
employees. Do you believe that large-scale farming is prac- 
tical? Do you believe that large farms operated by corpora- 
tions will replace the small farm operated by the individual 
owner or tenant? Give reasons. 

2. To what extent is farming in the United States commer- 
cialized? Are we justified in assuming without proof, as 
is often done, that commercial farming is better than pioneer 
farming? 

3. Does the demand for farm products vary with the 
prices of these products? With the general prosperity of the 
country? Why, or why not? 

4. Why does the price received by the farmer constitute 
such a small part of the price paid by the consumers for 
finished goods made from farm products? 

5. Some people have expressed a fear that low prices for 
farm products would make peasants of our farmers. What 
is the difference between a peasant and a farmer? Do you 
believe there is a danger that low prices for farm products 
will make peasants out of the American farmers? 

6. Can the farmer forecast future prices accurately enough 
to enable him to shift production to more profitable crops? 
Discuss. 



278 Marketing Farm Products 

7. How do cooperative organizations of farmers attempt 
to raise prices for their members? 

8. Can the farmers secure monopoly prices for their prod- 
ucts? If so, how? If not, why? 

9. Cooperatives often attempt to increase the demand for 
their products. In recent years, the consumption of the 
following products has increased: oranges, lettuce, and car- 
rots; rayon; rubber; sugar; spinach; and canned fruits and 
vegetables. The consumption of the following has been more 
or less stationary: kale, parsnips, and meats; while the con- 
sumption of wheat, potatoes, hay, and horses has declined. 
We can eat only a certain amount of food, and the wealthy 
man can eat no more than the workingman. What causes 
the demand for some products to increase? To decrease? 
To what extent can cooperative associations increase the 
demand for the products of their members? 



CHAPTER 16 

Marketing Grain and Livestock 

Grain 

Chief grains. Wheat, rice, corn, oats, rye, barley, flax- 
seed, millet, and the sorghums are the world's most im- 
portant grains. In most parts of the western world, 
wheat is the most important food cereal, while rice leads 
in eastern Asia. Corn, rye, barley, and millet are also 
important as human foods. Corn is the most valuable 
grain raised in the United States, but is used chiefly as 
stock feed. Other important forage grains are oats, 
barley, rye, and the sorghums. 

Grain belts. The chief grain belts of the world are: 
eastern and southern Asia, Europe, central North Amer- 
ica, Argentina, and southeastern Australia. Wheat is 
grown in all of these areas. Rice is grown principally 
in Asia. Corn is grown in North and South America 
and in southeast Europe. Oats are important in both 
Europe and the United States. 

Wheat. Wheat is used largely for making bread and 
is the world's most important commercial grain. Europe 
is the largest producer and also the largest consumer. 
Western Europe, especially England, Belgium, and the 
Netherlands, does not ordinarily raise enough to satisfy 
its needs and is the leading importer. Central North 
America comes second as a producer and first as an 
exporter. Other important producing sections are Ar- 
gentina, Australia, India, north Africa, and the Columbia 
River basin in eastern Washington and Oregon. 

279 



280 Marketing Grain and Livestock 

Kinds of wheat. There are five important kinds of 
wheat: hard spring, hard red winter, soft winter, white, 
and durum. Hard spring wheat is high in gluten and 
its flour is prized for making loaf bread. It is also used 
for blending (mixing) with other wheats. Hard red 
winter wheat also makes excellent flour for loaf bread. 
Soft winter wheat makes flour used for quick breads and 
pastry, and is blended with harder wheat for making 
flour used in loaf breads. White wheat is used for bread 
and pastry flours and breakfast cereals. Durum wheat 
is used for making macaroni and spaghetti. It is high in 
gluten but has a yellowish color, for which reason it is 
shunned in the making of bread flour. 

Production of wheat in the United States. Our an- 
nual wheat crop has varied from 600,000,000 to 
1,000,000,000 bushels and averages some 800,000,000. 
The limitation of acreage by the Agricultural Adjust- 
ment Administration and the drouth of 1934 reduced 
our production so much that we imported wheat in 1934, 
1935, and 1936. We consume (in the form of food and 
seed) five bushels per capita, or a total of close to 
650,000,000 bushels, per year. In normal years this 
leaves approximately 150,000,000 bushels for export. In 
some years our crop of spring wheat is too small for 
our needs, and we import some of this variety from 
Canada. In most years we export a part of our crop 
of the other varieties. 

Wheat is grown pretty generally throughout the coun- 
try except in the Cotton Belt, New England, and the 
arid sections of the Southwest. There are two main 
belts. One centers in central Kansas and spreads out 
into western Oklahoma, northern Texas, and southern 
Nebraska. This belt grows principally hard winter 
wheat. The other includes North Dakota, northeastern 



Marketing Grain and Livestock 281 

South Dakota, eastern Montana, and western Minne- 
sota. This belt grows largely hard spring and durum 
wheats. There are three minor belts: (1) Illinois, In- 
diana, Ohio, and southern Michigan; (2) eastern 
Washington and Oregon; and (3) Maryland, south- 
eastern Pennsylvania, and Virginia. Soft winter wheat 
is grown largely in eastern United States. White wheat 
is grown in New York and Michigan. Eastern Wash- 
ington and Oregon raise hard red winter wheat, spring 
wheat, and white wheat. 

The country marketing of wheat. In the central 
part of the country, the country marketing of wheat 
centers about the elevators, which handle wheat in bulk. 
The elevator gets its name from an endless belt of 
scoops which carries the grain to the top of the building, 
from which point it is distributed by gravity into the 
storage bins. Wheat is handled in sacks and stored in 
warehouses in the eastern part of the country and on 
the Pacific Coast. The wheat is hauled to the elevators 
with horses and motor trucks. If motor trucks come 
into general use, the number of country elevators will 
probably decline. 

For the most part, the elevators and warehouses are 
operated by dealers who buy grain from the farmers 
and sell to buyers in the central markets. The farmer 
may sell his gr&in as soon as it is threshed, or he may 
store it in his granary for an advance in price. He 
usually sells to the elevator operator for cash. At 
times he stores it in the elevator or warehouse and sells 
later. This is a common practice on the Pacific Coast. 
The charge for storage in the central states is ordinarily 
from l/ 2 j to 1^ per bushel per month. 1 



1 Occasionally the farmer contracts for the sale of his grain to an 
elevator before it is harvested. Some farmers sell their wheat to a 



282 Marketing Grain and Livestock 

Types of elevators. The elevators may be operated 
by independent concerns, by large companies operating 
a line (or chain) of elevators, by farmers' cooperative 
associations, or by millers. The independent, or indi- 
vidual, elevator is owned by a local concern which 
ordinarily operates only one elevator. The farmers 
cooperatively own some 3,000 elevators, which handle 




Courtesy U. 8. Lfept. Agriculture. 

Fig 1 . 23. Country elevator. Wagons are delivering corn. The 
grain is shipped on a railroad which is on the other side of the 
elevator. 

approximately 35 or 40 per cent of the grain marketed. 
Operation of elevators. Privately operated elevators 
are in business for profit and try to buy the grain as 
cheaply as they can. The price they pay is based on 
the price in the central market to which they ship, 
the freight rate to this market, the competition which 
the elevator has to meet from other buyers, and its 
operating expense. The price in the central market is 

local flour mill; some ship it to a central market and have it sold 
there; and some sell through cooperative associations which operate 
pools. 



Marketing Grain and Livestock 283 

ascertained daily or hourly, and the freight rate to 
the central market is known. If the elevator is to stay 
in business, it must make enough money to cover these 
and pay its operating expenses. If there are several 
elevators at a shipping station or at adjacent stations, 
they may have to pay the full market price in order 
to secure the grain. On the other hand, if there is little 
competition, the elevator may be able to buy the grain 
at lower prices. 

The price of grain varies with quality. The grade is 
determined by the elevator operator inspecting the grain 
to determine the amount of foreign matter, its specific 
gravity, the percentage of shrunken grains, and damage 
from heating. 2 

Sale of grain by elevators. The country elevator con- 
signs its grain to a commission man (called a "broker") 
in a central market who sells it on a commission basis 
or sells it outright to a grain merchant or to a manu- 
facturer. More than two-thirds of the grain is con- 
signed to "brokers/' who receive and sell the grain. They 
deduct their commissions and the expenses of freight, 
inspection, and weighing, and send the balance to the 
elevator operators. 3 

Buyers in the central markets send out offers to the 
country elevators. These offers may be for grain "on 



2 Complaints of improper grading are heard at times. There are two 
important complaints regarding proper grading: first, that the elevator 
operator pays all farmers the same price, thus penalizing the farmer 
with a high grade of grain; second, that the elevator operator under- 
grades the grain. He may promise a farmer $1 for No. 2 wheat. This 
may be a fair price. Yet when the farmer delivers the wheat, the 
elevator may say that it is No. 4 and pay only 96 cents. The farmer 
is often unable to tell whether or not his grain is properly graded. 

3 Very commonly the elevator ships the grain on an order bill of 
lading with a sight draft attached for some 75 per cent of the value 
on the day of shipment. In this case the "broker" deducts his ex- 
penses from the other 25 per cent. 



284 Marketing Grain and Livestock 

track" or "to arrive." "On track" means that the price 
applies f.o.b. at the country shipping point, while a 
"to arrive" sale means that the country elevator must 
pay the freight to the central market. 

Terminal marketing of grain. The principal middle- 
men or institutions involved in the terminal marketing 




Fig. 24. Terminal elevator. This particular elevator is located 
in -a harbor where vessels are loaded for export. The grain is re- 
ceived by rail, and may be shipped by water or rail. 

of grain are the grain dealers, brokers, cooperative sales 
agencies, terminal elevators, millers and other manu- 
facturers, exporters, and the grain exchanges. 

The grain dealer is often a merchant, a commission 
man, a broker, and sometimes an elevator operator. As 
a merchant he buys and sells grain on his own account. 
As a commission man he receives and sells grain on 
consignment. As a broker he negotiates contracts for 
the purchase or sale of grain for others. He buys from 
the country elevators and sells to terminal elevators, 
to millers, and to brokers representing millers, manu- 



Marketing Grain and Livestock 285 

facturers, and exporters; he is often a member of the 
grain exchange and sells on the floor of the exchange 

The terminal elevators often buy grain for storage, 
hoping to sell it later at a higher price. They also store 
and condition grain for others for a fee. By "condi- 
tioning" grain is meant drying, cleaning, cooling, and 
bleaching. By mixing and conditioning, the grade of 
wheat is often raised. Some No. 2 wheat may be mixed 
with No. 1 wheat without lowering the grade of the 
lot to No. 2. Over a period of years, 46 per cent of the 
wheat received by a group of Chicago elevators was 
graded No. 1 and No. 2. Yet during this same period, 
95 per cent of the wheat sold by these elevators was 
graded No. 1 and No. 2. 

The operations of grain exchanges were discussed in 
Chapter 8. 

The price of wheat. The price of wheat is determined 
by the supply and demand throughout the world. The 
price received by American farmers may, in normal 
times, be affected more by the size of the crop in Europe 
than by the size of the American crop. The size of the 
crop in the European countries determines very largely 
how much wheat they will have to import. The sur- 
pluses for export in the United States, Canada, Argen- 
tina, Australia, India, North Africa, and Russia are also 
very important. The supply and demand factors center 
on the floors of the grain exchanges, notably those in 
Liverpool and Chicago, where the actual prices are de- 
termined. It has been said that if the world crop is 
10 per cent below the average, the price will rise 15 per 
cent; whereas if the world crop is 10 per cent above the 
average, the price will drop from 9 to 12 per cent. 

Cost of marketing wheat. The price paid the farmer 
by the country elevator, according to a comprehensive 



286 Marketing Grain and Livestock 

study, averages 77 per cent of the price paid by the 
mill, 44 per cent of the retail price of flour, and 13 per 
cent of the retail price of bread. 

Production of corn. The total value of our corn crop 
is larger than the total value of our wheat crop. The 
United States produces about 70 per cent of the world's 
corn, and our crop averages some 2,800,000,000 bushels. 
Corn requires a hot, moist climate during the growing 
season. It is grown generally throughout the country 
east of the Rocky Mountains. Production, however, 
centers in the Corn Belt, which includes Iowa, northern 
Illinois, northern Indiana, western Ohio, south western 
Minnesota, south eastern South Dakota, eastern Ne- 
braska, and parts of Missouri, and Kansas. These states 
grow approximately two-thirds of our total crop. 

Uses of corn. Most corn is marketed on the hoof 
that is, it is fed to livestock and reaches the consumer in 
the form of meat. Our corn crop is used approximately 
as follows: 

Per Cent 
Fed to livestock on farms: 

Hogs 40.0 

Horses and mules 20.0 

Cattle 15.0 

Poultry and sheep 5.0 

Total 8OO 

Fed to livestock off farms 5.5 

Human food on the farms 3.5 

Ground into meal . 3.0 

Starch, glucose, corn, sugar, etc. . . 2.0 

Grits 1.0 

Exported 1.5 

Miscellaneous 3.5 

TOTAL 100.0 

It will be seen from these figures that more than 85 
per cent of the corn is fed to livestock. The farmers in 
two sections sell corn: (1) eastern Illinois; and (2) 



Marketing Grain and Livestock 287 

northwestern Iowa and eastern Nebraska. In other sec- 
tions the farmers use their corn for feed and sell hogs 
or cattle. Some corn is exported by Argentina, the 
United States, and Roumania, principally to the coun- 
tries of western Europe. 

Price of corn. Supply very largely determines the 
price of corn, and the supply depends upon the present 
crop plus the carry-over from previous years. The 
weather and the acreage planted very largely determine 
the size of a crop. A close relation exists between the 
rainfall in the Corn Belt during July and August (the 
growing season) and the price of corn. According to 
H. A. Wallace, it takes one inch of rain each ten days 
during July and August to hold the price of corn steady. 
If the rainfall is considerably above this figure, the price 
of corn will drop, while a deficiency in rainfall causes 
prices to rise. A corn crop 20 per cent above the average 
will reduce the price 20 or 25 per cent, while a crop 
20 per cent below the average will raise the price some 
40 per cent. A small crop thus has a total value larger 
than that of a large crop. 

Cooperative marketing associations. Approximately 
3,000 cooperative country elevators, with a half million 
or more members, did a business of about $275,000,000 
in 1933-34. The farmers' elevators do on the average 
a 50 per cent larger business than the privately operated 
elevators. This larger volume of business often gives 
the farmers' elevator a lower handling cost per bushel. 
These elevators try to help the farmers by efficient op- 
eration, fair grading of the grain, and the elimination 
of the 'private elevator's profft. An elevator can sell 
its grain immediately or hold it in storage and hedge 
against a drop in price. For these reasons, farmers' 
elevators often buy the grain outright from the farmers, 



288 Marketing Grain and Livestock 

instead of handling it on a pooled basis. Many of the 
cooperative country elevators are, at this writing, affil- 
iated with the Farmers National Grain Corporation, 
which is engaged in the terminal marketing of grain. 

Livestock 

Production of livestock. The United States is one 
of the leading producers of livestock and one of the 
leading consumers of meat. We are second to India in 
the production of cattle; second to China in the produc- 
tion of hogs; *and third in the raising of sheep, coming 
after Australia and Russia. 

The number of the different kinds of livestock on 
American farms was as follows in January 1935: cattle, 
61 million; sheep, 50 million; hogs, 37 million; and 
horses and mules, 17 million. The number of hogs was 
abnormally low because of reduction under the AAA 
program. In good years our farmers sell close to three 
billion dollars worth of livestock annually, excluding 
dairy and poultry products. The United States formerly 
exported large quantities of meat, but, as our population 
has increased, the export of meat has declined. 

Consumption of meat. The per capita consumption 
of meat in the United States in a recent year was 151 
pounds, divided as follows: pork, 73 Ibs.; beef, 51 Ibs.; 
lard, 14 Ibs. ; veal, 7 Ibs. ; and lamb and mutton, 6 Ibs. 4 



4 The consumption of meat varies somewhat from year to year with 
the supply and price. The demand for various kinds of meat varies 
somewhat between different racial, economic, and religious groups; 
different sections of the country; and different seasons of the year. 
Americans, Irish, Germans, Scandinavians, and Negroes are heavy pork 
eaters. Pork is typically the meat for the working group. The ortho- 
dox Jew eats no pork and only the forequarter of beef. Anglo-Saxons, 
Greeks, and Armenians are heavy consumers of mutton. Veal ig^opu- 
lar with the Jews and Slavs. Fewer heavy cuts of meat are wanted 
for home consumption than a generation ago, owing to smaller families, 



Marketing Grain and Livestock 289 

Livestock sections. Some livestock is raised on 
almost all farms. The production, however, is much 
more important in some sections than in others. Beef 
cattle are important in practically all states west of 
the Allegheny Mountains, but Texas, Nebraska, and 
Iowa are the leading producers. Hogs are raised in 
practically all farming sections east of the Rocky Moun- 
tains, while small numbers are raised in the Pacific 
Coast states. Commercial production, however, centers 
in the Corn Belt. Nearly half of the hogs are raised in 
Iowa, Illinois, Indiana, Ohio, Missouri, and Nebraska. 
The hog is the most efficient meat producer among our 
animals. He requires only one- third as much food to 
produce a given number of calories of human food as 
the steer; but he needs concentrated food, and corn is 
especially adapted to his needs. He is not a range 
animal. Cattle, on the other hand, can be raised on land 
unsuited to cultivation. Sheep can eat shorter grass 
than cattle, can be raised on drier land, and are often 
grazed on the high and rugged mountains. They are 
important in Texas and in the Rocky Mountain and 
Pacific Coast states. They are also important in certain 
areas in the East, notably Ohio, southern Michigan, 
north central Kentucky, and southwestern Pennsylvania. 

Concentration of livestock. Livestock is concentrated 
at two points in country shipping and concentration 
yards and in central markets. There is a considerable 
movement from one central market to another, and 
young and lean cattle are also shipped back to the farm 
from the central markets for maturing and fattening. 

small apartments, and light housekeeping. Fewer heavy cuts are 
wanted in hot weather. Less beef and pork are consumed during the 
Thanksgiving and Christmas holidays, owing to the consumption or 
poultry. 



290 Marketing Grain and Livestock 

The stock is brought to the country shipping station 
by truck or is driven in on foot, and it is transported 
from the country shipping station to the central markets 
by rail. A very large proportion is brought into the 
central markets by truck direct from the farms, thus 
eliminating assembling at country stations. 



^ - L ; ' ; ' ^"v 




uounesy u. &. uepi. agriculture. 

Fig. 25. Loading stock into railroad cars for shipment. 

Older methods of marketing livestock. Before the 
building of the railroads, livestock was driven to market 
on foot, often for hundreds of miles; or was shipped 
by water. When the railroads were built, most stock 
was shipped by rail. Two types of middlemen came to 
operate at country stations to assemble and ship the 
livestock to central markets private livestock buyers 
and cooperative shipping associations. The livestock 
buyer is in business for profit. He buys the stock from 
the farmers, drives or hauls it to the shipping station, 



Marketing Grain and Livestock 291 

loads it into cars, and consigns it to commission men 
in the central markets who sell it to the packers. The 
cooperative shipping association operates in somewhat 
the same way, except that it acts as the agent for the 
farmer, and usually does not pay him until the stock 
is sold and the money received from the commission 
merchant. The purpose of the association is to secure 
higher prices for the farmers. The manager watches 
price movements and tries to pick advantageous times 
and markets in which to sell. When he feels it is a good 
time to sell, he consults his members, and if they agree 
a shipment is made. It is consigned to a commission 
man or to a cooperative commission agency. At one 
time there were 5,000 of these cooperative shipping 
associations but with the increased use of motor trucks 
the number has declined to fewer than 1,500. 

Newer methods of marketing livestock. Changes in 
the method of marketing livestock came with the motor 
truck and with the packers' coming to buy stock in the 
country and shipping it direct to their plants. 

Truck shipments. At this writing, about three-fifths 
of the cattle, calves, and hogs are brought to the central 
markets by trucks. The trucks usually are loaded on 
the farms and bring the stock to central markets, where 
it is sold by commission men for the farmers. Trucking 
saves hauling the stock to country points and loading 
into cars, and it is often quicker than rail shipment, 
especially for distances under 200 miles. This means 
less shrinkage. On the other hand, truck shipments 
increase somewhat the marketing expenses in the central 
markets owing to the smaller lots in which the stock 
is handled. 

Concentration yards. For long distances rail trans- 
portation is cheaper, while for short distances the truck 



292 Marketing Grain and Livestock 

is cheaper. This fact has led to the development of 
concentration yards, at various country points, to which 
livestock is hauled by truck from one or more counties. 
The yards are operated by packers, cooperative associa- 
tions, or private parties. The stock is sold by the farmer 
to the operators, except that the cooperatives often 
handle it on an agency basis. Shipment from these 
yards to central markets is usually made by rail. The 
development of these concentration yards seems logical, 
and they have continued to grow. 

Direct marketing. The large packers have had diffi- 
culty in securing enough stock in the central markets 
to enable them to operate their plants at capacity, 
because of competition with local packers who are closer 
to the sources of supply. To secure adequate supplies 
they send their buyers to the country to buy stock from 
farmers, independent buyers, and cooperative associa- 
tions. This stock is often shipped direct to the packing 
plants unloaded at their plants or handled through the 
stockyards. This is known as "direct marketing/' and 
the animals are called "directs" when they reach the 
central markets. Direct marketing apparently reduces 
marketing cost somewhat, as it eliminates the commis- 
sion man. 5 It has grown until something like one-half 
of the hogs, one-fourth of the calves, one-fifth of the 
sheep, and one-sixth of the cattle are shipped direct to 
the packers. 

5 It is argued, however, that the farmer who sells his stock to a 
packer in the country often receives a lower price than he would in 
a central market, owing to the farmer's ignorance of grades and prices 
and the absence of competitive bidding at many country points. On 
their side, some packers say that stock bought direct costs them some- 
what more than stock bought in the central markets, for they pay a 
price in the country that is so near the city price that it does not 
allow for the full transportation cost. 



Marketing Grain and Livestock 



293 



Central markets. When the stock arrives in a central 
market, it is unloaded in the stockyards, placed in pens, 
and fed and watered, unless it is consigned to packing 
plants which have unloading facilities. The stockyard 
operator charges for the use of his facilities and for the 
feed consumed. 




Courtesy Swift & Co. 

Fig. 26. Stockyards in central market where livestock is re- 
ceived from the country and sold by commission men to packers. 

Sales are also made to yard traders, and to order-buyers for shipment 
to other markets. 

Commission men. The stock is ordinarily consigned 
to a commission agency for sale. There are two types of 
agencies: the private commission company and the 
cooperative commission company controlled by the, pro- 
ducers. The commission man has charge of the stock 
and sells it for the account of the shipper. He pays the 
freight and other charges, deducts his commission, and 
remits the balance of the money received from the sale 
of the stock to the shipper. In 1934, there were 41 



294 Marketing Grain and Livestock 

cooperative commission agencies, which did a business 
of $148,000,000. They generally charge the same rate 
of commission as the private agencies and return their 
profits to the shippers as patronage dividends. The 
commission companies have salesmen who are good 
judges of livestock and prevailing values. These sales- 
men follow prices closely from hour to hour, and they 
know the buyers for the packing plants. They often 
specialize, one man selling only one kind of stock, as 
fat steers, butcher cattle (lower grade animals), hogs, 
or sheep; they thus become experts in judging qualities 
and values. Even though the owner accompanies his 
stock to market, he usually has it sold by a commission 
man. 

Buyers of livestock. The livestock is sold to packers, 
to order buyers, and to yard traders. 

Reshipment of stock. Many of the consuming mar- 
kets, especially those along the Atlantic Seaboard, do 
not receive enough livestock direct from the country 
shipping stations to supply their needs. The packers 
in these markets must therefore place orders with buyers 
in other markets and have the stock shipped to their 
plants. Much livestock is shipped from one market to- 
another; for example, East St. Louis, Chicago, Sioux 
City, and Omaha ship a considerable portion of their 
hogs to other markets. The buying to fill these orders, 
is done by order buyers men who specialize in this 
work or by the buying departments of commission com- 
panies. Some livestock is shipped from primary markets 
to farmers for fattening or further growth. These are 
known as feeders and stockers. 

Yard traders. Yard traders, also called scalpers and 
speculators, buy stock from the commission men and 
sell to the packers and order buyers through the com- 



Marketing Grain and Livestock 295 

mission men. They buy when they think prices are 
going to rise and hold the stock a few days hoping to 
make a profit from higher prices. Hence the name 
"speculator." 6 

The yard traders also perform a grading function. 
The packers prefer to buy stock in lots of the same 
quality. Many mixed cars containing different kinds 
or grades of stock are received at the markets. The 
yard traders often buy these mixed cars and re-sort 
the stock into lots of uniform quality. 

Cost of marketing. The typical consumer's dollar 
spent for meat is divided as follows: to the farmer, 50^; 
for marketing livestock, 10^; to the packer, 20^; and 
to the retailer, 20^*. 

Prices. The price of livestock depends upon demand 
and supply. The demand for livestock is determined 
by the demand for different cuts of meat and for the 
different by-products. The demand varies somewhat 
with fashion, price, and prosperity, but the demand is 
much more stable than the supply. The supply varies 
over a period of years with price. When prices are high 
the producers raise more stock; when the prices are 
low they raise less stock. In the past this has given 
rise to a more or less definite series of cycles. The 
cyclical movement of supply and prices will be illus- 
trated by prices of corn and hogs. 

Corn-hog ratio. Hogs are fed largely upon corn. 
Since it takes about 11.5 bushels of corn to put 100 
pounds of weight on a hog, there is a more or less definite 
relationship between the price of corn and the price of 

6 Their existence is partially explained by the uneven receipts of 
stock on different days of the week. These receipts are much heavier 
during the first part of the week than during the latter part of the 
week. 



296 Marketing Grain and Livestock 

hogs. Over a 50-year period, the price of 11.3 bushels 
of corn has equalled the price of 100 pounds of live hog 
at Chicago. The ratio between the price of corn and 
the price of hogs, however, varies widely from time to 
time. At one time the price of 7.4 bushels of corn has 
equalled the price of 100 pounds of hog, while at another 
time it has taken 16.5 bushels of corn to equal the price 
of 100 pounds of hog. 

The relationship between the price of corn and the 
price of hogs is called the corn-hog ratio. If the price 
of corn is high relative to the price of hogs, the farmers 
want to sell corn, as it is worth more on the market than 
as hog feed. Conversely, when the price of hogs is high 
relative to the price of corn, the farmer prefers to sell 
hogs. 

The corn-hog ratio indicates whether it is more profit- 
able to sell corn or hogs. If the ratio is below the 
average, there is more profit in corn than hogs; if the 
ratio is above the average, it is more profitable to feed 
the corn and sell the hogs. The average monthly ratios 
should be watched carefully by hog raisers. The average 
monthly ratios for a 50-year period are as follows: 

January 11.8 May 10.9 September. . . .11.3 

February 12.4 June 10.9 October 11.2 

March 12.3 July 11.0 November. . . .10.5 

April 11.8 August 10.9 December .... 10.9 

Thus if in November the price of corn is 80^ and 
the price of heavy hogs is $9.25 (Chicago prices), it 
is more profitable for the farmer to feed his corn to hogs 
and sell the hogs. On the other hand, if the price of 
corn is 80^ and the price of hogs $7.75, it is more 
profitable for the farmer to sell his corn. 



Marketing Grain and Livestock 297 

Use of corn-hog ratio. In order to have hogs to sell 
when hogs are profitable and corn to sell when corn is 
profitable, it is necessary to forecast prices. It takes 
something like a year to raise pigs and have them fat- 
tened for the market. Prices must, therefore, be antici- 
pated by a year or more. 

One authority gives this advice: When the corn-hog 
ratio has been below the average for several months or 
a year (say 6 to 15 months), the farmer should raise 
more pigs. When the corn-hog ratio has been above the 
average for several months or a year, he should reduce 
the number of pigs. 

The farmer is advised to increase his production of 
pigs when hogs are less profitable than corn and to 
decrease his production of pigs when hogs are more 
profitable than corn. The advice is based on the assump- 
tion that, when corn is high relative to hogs, most 
farmers will cut down the number of hogs raised so 
that they can sell more corn. This will mean that 
within about a year the ratio will change. On the other 
hand, when corn is cheap relative to hogs, the assump- 
tion is that most farmers will increase the number of 
pigs. When this extra supply of pigs reaches the market, 
the price will drop. The farmer is thus advised to 
increase production when prices are low and to decrease 
production when prices are high. The individual farmer 
thus attempts to follow a course opposite that followed 
by the majority of farmers. This advice appears to be 
good as long as the majority of farmers act as expected. 
If, however, the majority of farmers should follow this 
advice, prices would not move as anticipated, and the 
advice would no longer be good. A new method of 
forecasting would be needed. 



298 Marketing Grain and Livestock 

Chapter 16 
Review Questions 

1. What are the world's principal grains? 

2. Where are the world 's main grain belts? 

3. Locate the main wheat belts of the world. 

4. What are the different kinds of wheat? Where is each 
kind grown? What are the uses of each kind? 

5. What position does the United States occupy in the 
production of wheat? In the export of wheat? 

6. Where are the leading wheat-producing sections in the 
United States? 

7. How is wheat marketed at country points? 

8. What are the various types of country elevators? 

9. How is wheat graded at country points? 

10. How does the country elevator sell its grain? 

11. How is grain marketed in terminal markets? 

12. What services do the terminal elevators perform? 

13. What factors influence or determine the price of wheat? 

14. What position does the United States occupy in the 
production of corn? 

15. What are the chief uses of corn? 

16. How is corn marketed? 

17. What determines the price of corn? 

18. How important are farmers 7 elevators? How do they 
operate? 

19. How does the United States rank in the production of 
livestock? 

20. Locate the main producing sections (U. S.) for beef 
cattle and for hogs. 

21. What are the differences in the conditions under which 
hogs, cattle, and sheep are raised? 



Marketing Grain and Livestock 299 

22. How is livestock transported to country markets? To 
central markets? What are concentration yards? Why have 
they developed? 

23. How is livestock marketed at country points? 

24. What functions are performed by livestock buyers and 
shippers? 

25. What is meant by "direct marketing" of livestock? 
Why is stock marketed in this way? 

26. How is livestock marketed in central markets? 

27. How do commission companies operate? What func- 
tions do they perform? 

28. What is meant by order buying? 

29. What are stockers and feeders? 

30. What are yard traders? What functions do they per- 
form? 

31. What is the corn-hog ratio? 

32. How can the corn-hog ratio be used by the farmer? 

33. If No. 2 corn is 40^ and heavy hogs are $5.60 in 
Chicago, what is the corn-hog ratio? 

34. What determines the prices of livestock? 

Thought Problems 

1. The United States has a tariff on the importation of 
wheat. This law was enacted to help the wheat farmers. 
Does it help them? Why or why not? Can our grain 
farmers secure higher prices through tariffs? 

2. If a farmers' cooperative elevator undergrades the grain 
purchased from its members, are they injured by such action? 

3. Americans consume very little rice. Why? Would 
a larger consumption benefit the growers? Could the rice 
growers induce the consumers to eat more rice? If so, how? 
If not, why? 

4. What functions are performed bv country elevators? 



300 Marketing Grain and Livestock 

5. Can the livestock producers increase the consumption 
of meat? 

6. What effects do the following have on the demand for 
various kinds of meat: Smaller families? Women working 
for wages outside of the home? Small apartments? Increase 
in the purchase of ready cooked foods? The increasing habit 
of eating in restaurants? The continued substitution of 
power-driven machinery for human muscle? The prevailing 
fashion for figure, e. g., to be slender or stout? 

7. (a) If corn is 50^ and hogs are $6.00 in November, is it 
more profitable to sell corn or hogs? If the ratio remains at 
this point for more than a year, what should the Corn Belt 
farmer do? 

(b) If corn is 60^ and hogs are $5.00, what is the corn- 
hog ratio? If the ratio remains at this point for months, what 
should the Corn Belt farmer do? 



CHAPTER 17 

Marketing Dairy Products 

Value. The dairy cow is the greatest producer of 
wealth on American farms. The 25,000,000 dairy cows 
in the country produce over 100 billion pounds of milk 
annually, which, with the products made from it, nor- 
mally has a value of over $2,000,000,000. The milk is 
consumed approximately as follows: 

Per Cent 

Fluid milk 47 

Butter 36 

Ice cream 4 

Cheese 3 

Condensed milk, powdered milk, casein, 

milk chocolate, etc 4 

Fed to calves and wasted 6 

Perishability. Fresh milk is perishable and must be 
consumed promptly or manufactured into butter or other 
products. Butter can be kept at very low temperatures 
and can therefore be stored for considerable periods with 
little deterioration. Consumers make little distinction 
between fresh and storage butter, for which reason the 
price of butter fluctuates less than that of many other 
perishable products. 

Production. Milk is produced on the great majority 
of the farms. On specialized dairy farms milk is the 
chief product sold, but a very considerable portion of 
the milk and cream of the country is produced on 
farnr ^hich raise other products. Milk and cream must 

301 



302 Marketing Dairy Products 

be assembled from over wide areas, and their perish- 
ability makes it necessary for them to reach the market 
promptly. Milk is produced the year around, but pro- 
duction is much higher in the spring and summer than 
in the fall and winter, shipments being 30 to 60 per 
cent higher in July than in January. 

Demand. Most consumers want about the same 
quantity of milk and butter each day. Price affects 
demand, especially the demand for butter. 

Marketing fluid milk. The perishability of milk leads 
to a large production near the market. So we find a 
large number of dairy cows near large cities, particularly 
in the North Atlantic states, to supply the large popu- 
lations of the eastern cities. 

Concentration of milk. Milk is transported by truck 
from the farm to the city milk plant or to the country 
receiving station. The use of trucks has lessened the 
need for country stations, as milk is often hauled direct 
from the farms to city milk plants for distances of 50 
miles and more. Country receiving stations are, how- 
ever, still important in the outlying portions of the 
producing areas. The milk is cooled in these stations 
and transported to the cities by rail or in insulated 
tank trucks. Some country stations pasteurize and bottle 
the milk. 1 Cream has a higher value per pound than 
milk and so is transported for greater distances. Boston, 
for example, receives cream from states as far distant 
as Michigan and Tennessee. 

The city milk distributors usually buy the milk from 
the farmers and have it hauled to their plants, although 
some farmers deliver it themselves. At times coopera- 
tive associations or private buyers receive the milk from 

1 0ne large chain store, for example, has its milk pasteurized and 
bottled in the country, so that no city milk plants are needed. 



Marketing Dairy Products 303 

the farmers and sell it to the distributors. In the mar- 
keting of sweet cream, creameries, brokers (sales agents), 
and wholesalers operate in the marketing process. 

Dispersion of milk. Milk is sold to the consumers by 
milk dealers, retail stores, farmers, and cooperative as- 
sociations. The milk dealer often buys the milk from 
the farmer, pasteurizes and bottles it, and delivers it on 
the consumer's doorstep. He often supplies stores, res- 
taurants, hotels, hospitals, soda fountains, and ice cream 
manufacturers. Some milk is also sold to "sub-dealers" 
who deliver it to the consumers. The consumer usually 
buys his milk from a dealer or a store, so that only one 
or two middlemen are involved. If he buys from the 
farmer, no middleman is involved. 2 

Cooperative associations. There are approximately 
185 cooperative associations, with a membership running 
into the hundreds of thousands, interested in the market- 
ing of fluid milk. There are two types of associations: 
bargaining and operating. The bargaining association 
represents the farmers in negotiating prices and terms 
with the dealers, but it does not handle the milk, which 
is delivered to the dealers, and the farmers receive their 
pay from the dealers. The bargaining association may 
be compared to brokers who negotiate sales contracts 
with buyers, or to labor unions which negotiate wage 
scales with the employers. In addition to negotiating 
prices and terms, the association may guarantee pay- 
ment by the dealers, may audit the dealers' books to 
see that full payment is made, may check the dealers' 
butter fat tests, and may organize and supervise the 
operation of pools. In 1933 there were 80 bargaining 

2 Three, or even four, of the following middlemen may, however, be 
involved: the cooperative association or country buyer, the broker, 
the dealer, the sub-dealer, and the restaurant or store. 



304 Marketing Dairy Products 

associations which were responsible for the sale of 
$131,000,000 worth of milk. 

Operating associations, on the other hand, actually 
handle the milk, selling it at wholesale to dealers or at 
retail to the consumers. They may sell all the milk 
to the dealers; may sell a part to the dealers and have 
their own plants for manufacturing the surplus; or 
may sell the surplus to manufacturers. In 1933 there 
were 105 operating associations, with sales totaling 
$81,000,000. 

Price. Milk is the only major farm product that has a 
controlled price. 3 The prices of most farm products 
are determined on open and free markets by supply 
and demand. This is true of butter but not of fluid 
milk, the price of which is often determined by agree- 
ments between milk dealers and cooperative associations. 
In the depression of the early 1930's, the purchasing 
power of the consumers was so low that the price of 
milk was forced down in some markets until it cut into 
the profits of the dealers and farmers. In several states, 
milk boards were established at the request of the pro- 
ducers and dealers in the hope that they would raise 
prices and prevent price cutting. In some states these 
boards are given the right to fix prices and to examine 
the dealers' books. These states apparently consider 
the milk business a public utility and intend to regulate 
it accordingly. 

In order to control the price of milk, it is necessary 
to control the supply. This is attempted by the classi- 
fication and base-surplus methods of paying the farmers, 
which are discussed below. Under the base-surplus plan, 
the farmers' sale of milk on the fluid market may be 
limited to the amount of his base or quota. At times 

3 Aside from price control by the government. 



Marketing Dairy Products 305 

producers have not been allowed to increase their bases, 
and bases have been refused to new producers. Ex- 
pensive fixtures and equipment have also been required 
of the producers in some markets in the hope of forcing 
small producers off the market and preventing new pro- 
ducers from entering the market. Boards of health and 
milk boards have at times been induced to undertake 
the enforcement of such regulations. Reasonable sani- 
tary regulations are desirable to protect the health of 
the consumers, but the regulations in force in some 
markets cannot be justified by this reason. 

In considering the price of milk, we should remember 
two factors: first, the seasonal variation in production, 
commonly called "the surplus problem" ; and second, the 
fact that the price of fluid milk is often higher than its 
value for manufacture into butter or other products. 

Basis of paying farmers : Flat price. The dealers may 
pay the farmers a flat rate for their milk so much 
per 100 pounds or per quart. The dealers may buy 
only enough milk to supply their customers. If they 
buy more than this amount, the price paid the farmers 
will be based on the average price received for fluid 
milk, cream, and manufactured products. This is the 
simplest method of paying the farmers and many farmers 
prefer it for this reason. This plan, however, does not 
encourage the farmer to produce an even supply through- 
out the year, since he is not penalized for a low pro- 
duction in winter and since he receives the specified 
price for heavy production in summer. 

Classification plan. The dealers often buy more milk 
than they are able to sell in fluid form. The surplus 
may be sold as cream or may be manufactured into ice 
cream, cheese, or butter. Milk is worth different prices 
for each of these uses. Instead of paying the farmer 



306 Marketing Dairy Products 

a flat rate based on the average price received, the dealer 
often pays the farmer a different price for the amount 
used in different ways. This is known as the classifica- 
tion, or use, plan. A dealer may sell 60 per cent of his 
milk as fluid, sell 10 per cent as cream, and manufacture 
30 per cent into butter. The price agreed upon for 
fluid milk (Class I) may be $2.50 per 100 Ibs., the price 
for cream (Class II) $1.50, while the milk may be worth 
$1.00 for butter making. If a farmer delivers 10,000 
pounds of milk during a given month, he will receive 
$2.50 per 100 Ibs. for 6,000 pounds; $1.50 per 100 Ibs. 
for 1,000 pounds; and $1 per 100 Ibs. for 3,000 pounds; 
or a total of $195. This is an average, or blended, price 
of $1.95 per 100 pounds. 

The advantage claimed for this plan as compared with 
the flat price is that the farmer knows that if he 
increases his production he will receive a lower price 
for the additional amount. The plan thus attempts 
to limit the supply. The farmer, however, bases his 
operations upon the average (blended) price received. 
If this is above the cost of production, he will increase 
his output. This gives the dealers more surplus, which, 
it is argued, they are in a poor position to handle as 
compared with specialized manufacturers. It also in- 
creases the production of milk used in making butter in 
areas near large cities, where costs of production may 
be higher than in other sections of the country. In 
order to maintain the average price at a profitable level, 
the marketing association often tries to boost the price 
of milk for the fluid market as high as the traffic will 
bear that is, to the level of a monopoly price. 

The farmers often dislike the classification plan be- 
cause they do not know in advance how much they will 
receive for their milk. They must also trust the dealer's 



Marketing Dairy Products 307 

honesty for proper payment, unless the cooperative as- 
sociation audits his books. This may be important, 
since it is highly profitable for the dealer to pay for 
milk in a lower class than that in which he uses it. 

Base-surplus plan. The base-surplus plan was 
adopted to induce the farmer to even up his production 
throughout the year. Under this plan each farmer is 
given a base, or quota. The base may be his average 
production during the months of October, November, 
and December (often the months of lowest production). 
For the basic quantity produced the farmer is paid the 
fluid, or Class I, price, while he receives a lower price 
for the surplus. This is a direct inducement to even 
up the supply throughout the year in order to receive 
the higher price for all of his milk, and the plan has 
been successful in getting the farmers to do this. 

As the Class I price has often been above the cost 
of production, the base-surplus plan has not limited 
the supply to the needs of the fluid market. For this 
reason, the plan has been combined with the classifica- 
tion plan in many markets. Under the combined plan 
the farmer is paid for his base milk according to the 
use to which it is put; that is, the farmer may not 
receive the Class I price for all of his quota. As different 
farmers produce different percentages of their bases, the 
average price paid to different farmers selling to the 
same dealer varies. This makes a very complicated 
system too complicated for the farmers to understand 
and too complicated to try to explain here. 

High prices. From the above discussion it is clear 
that the milk producers through their associations have 
often tried to secure high prices for their milk in some 
instances all the "traffic would bear/' or monopoly prices. 
In some cases where the dealers have refused price 



308 Marketing Dairy Products 

increases, "milk strikes" have been called. As milk 
is perishable and the cities have little milk in reserve, 
the farmers have often been given higher prices for 
their Class I milk. However, canned milk has just as 
high food value as fluid milk, and reconstituted milk 
can also be made from skim milk powder and butter, 
which, we are told by experts on foods, is just as 
nutritious as fresh milk. Milk can now be transported 
for hundreds of miles in insulated tank cars. These 
factors may, in the future, seriously limit the power of 
farmers near large cities to secure high prices for their 
milk. 

Proper price basis. It would seem that the price of 
milk sold upon the fluid market should be based on the 
price of butter, 4 with a sufficient difference to cover the 
extra costs of special care and handling and of the 
equipment required to meet city health requirements, 
and to cover the value of the skim milk which leaves 
the farm. 

Other factors. The price paid the farmer is usually 
based on milk with a specified percentage of butterfat, 
perhaps S 1 /^ per cent. The farmer is paid a premium 
for excess butterfat, while a deduction is made for a 
deficiency. The farmer may receive a premium for 
producing milk which has a very low bacterial count 
(grade A). 

The consumer. The consumer wants safe milk at a 
reasonable price. Milk is often tested for percentages 
of butterfat and examined for the number of bacteria. 
The cows are often tested for tuberculosis and other 
diseases, and the barns and plants are inspected for 

4 Some feel that the price paid for milk by condenseries would be 
a, better guide. 



Marketing Dairy Products 309 

cleanliness. In some markets, inspection by the health 
departments is strict, while in others, there is little or 
no inspection. The consumer's main protection against 
a high price has been competition among farmers and 
distributors. His weapon is reduced consumption when 
the price seems too high. 

Cost of marketing milk. Milk must be kept cool, 
moved quickly, and delivered to the consumers in small 
quantities. On the other hand, it is marketed regularly 
during the year, which means that distributing facilities 
can be steadily employed. The farmers generally receive 
something like one-half of the price paid by the con- 
sumers. Figures showing the cost of marketing milk 
in four cities follow: 

Chicago St. Louis Peoria Quincy Average 

Farmer received 45.7# 51 .4# 65.9^ 69.2ff 46.9ff 

Purchasing, receiving, and 

processing 15.2 10.8 16.3 12.3 14.9 

Selling and delivering 32.1 29.9 9.9 12.5 31.2 

General and administrative . 3.5 2.8 6.2 3.2 3.6 

Dealer's profit 3.5 5.1 1.7 2.8 3.4 

Consumers pay lOO.Off lOO.Off lOO.Off lOO.Off lOO.Off 

It will be observed that the marketing cost was higher 
in the large cities than in the small cities. This may be 
due to the higher wage scales, the greater distances that 
milk must be transported, and the larger areas over 
which it must be delivered. The consumers in the 
smaller cities often receive their milk at lower prices 
than those in the large cities. 

Marketing butter. There are two kinds of butter: 
farm butter and creamery butter. Farm butter is made 
on the farm and consumed to a large extent on the 
farm. One-fourth of the butter is made on the farms, 



310 



Marketing Daily Products 



but only ten per cent of the butter upon the market 
is farm butter. It is sold for local consumption by the 
farmer, delivering to the consumer or selling to the local 
grocery store, or to produce dealers. The produce dealers 
ship some of it to the city markets in barrels. 




Courtesy U. S. Dept. Agriculture. 

Fig. 27. A small creamery located in the dairy country. A 

largo portion of our butter is made in such creameries. 

More than one and a half billion pounds of creamery 
butter are manufactured annually by nearly 4,000 
creameries. Approximately one-third of the creameries, 
marketing 35 per cent of the creamery butter, are coop- 
eratively owned by the farmers. The Middle West is the 
leading butter-producing section, with Minnesota, Iowa, 
and Wisconsin the most important states. Large 
amounts of butter are also produced on the Pacific Coast. 

Creameries are of two kinds: small local creameries, 
drawing their milk or cream from nearby farmers; and 



Marketing Dairy Products 311 

large creameries, or centralizers, which draw their cream 
from large areas, sometimes for hundreds of miles. To 
assemble cream from large areas, cream station middle- 
men are necessary. Most cream stations are agents for 
the centralizers, but about 10 per cent are independent 
dealers. They buy cream from the farmers, test (grade) 
it for butterfat and acidity, pay the fanners, and ship 
it to the creameries. 

Trade channel for butter. Butter sent to the large 
cities is generally shipped by the creamery to a wholesale 
dealer, to a commission man who sells it on a commission 
basis, or to the creamery's branch house. 5 The broker 
may be used as the salesman. The wholesalers sell to 
jobbers, chain stores, large hotels, and other large buyers; 
the jobbers sell to the small retailers and restaurants. 
Many wholesale receivers are also jobbers. Many of the 
large centralized creameries have their own branches, 
in the larger cities, which they operate as wholesale 
houses. Many of the cooperatives sell through federated 
sales agencies. Butter made by city milk dealers is 
often sold direct to the consumers from their wagons. 

Cost of marketing butter. The cost of marketing 
butter is relatively smaller than the cost of marketing 
most farm products. It is a staple product in regular 
demand and it can be stored to prevent spoilage. For 
these reasons, dealers can handle it on narrow margins. 
Transportation costs, likewise, take a relatively small 
part of its value. The farmer receives about two-thirds 
of the retail price paid by the consumer. 



r 'In 1929 creameries sold their butter as follows- to wholesalers, 39.6 
per cent; to manufacturers' branch houses and federated sales agencies, 
22.5 per cent; to retailers, 22.8 per cent; to consumers, 10.2 per cent; 
to restaurants, hotels, etc., 2.6 per cent; and to manufacturers' retail 
stores, 2.3 per cent. 



312 Marketing Dairy Products 

Chapter 17 
Review Questions 

1. What characteristics of dairy products affect the 
methods used in marketing them? 

2. To what extent are the following products adapted to 
storage: fresh milk? condensed milk? powdered milk? butter? 

3. Where are the principal producing areas in the United 
States for milk? butter? 

4. What can you say of the demand for milk? For butter? 
How is the demand affected by changes in price? 

5. How is milk transported to market? 

6. What is the trade channel for milk? 

7. What types of cooperative associations are engaged in 
marketing fluid milk? 

8. How does the bargaining association operate? What 
marketing functions does it perform? 

9. What functions do operating associations perform? 

10. Describe the classification plan. 

11. Describe the base-surplus plan. 

12. What is the object of these plans? Have they been 
successful in attaining their objective? 

13. What is meant by saying that milk has a "controlled 
price"? 

14. How do the producers attempt to secure monopoly 
prices? 

15. How are the consumers' interests guarded in the pur- 
chase of milk? 

16. What can you say of the cost of marketing milk? 
What factors contribute to a high cost? What factors con- 
tribute to a low cost? 

17. Why does it cost more to market milk in a large city 
than in a small city? 



Marketing Dairy Products 313 

18. What are the two kinds of butter? What are the two 
types of creameries? 

19. Where are most of the creameries located? 

20. How do centralizers obtain their cream? 

21. How is butter marketed? 

22. How do you explain the relatively low cost of marketing 
butter? 

Thought Problems 

1. The Sunny Valley Milk Producers Association employs 
a base-surplus plan. Each farmer names the amount of milk 
he will deliver daily during the life of his contract. For this 
amount he receives the fluid milk price. For all milk over 
this quantity he receives a price based on the Chicago price 
of 92 score butter. If he delivers less than the stipulated 
amount, he receives the base price for the amount delivered 
less a deduction equal to the amount of shortage multiplied 
by the difference between the base price and the price of 
milk for manufacture. 

George Jones agrees to deliver 100 pounds of milk a day, 
or 3,000 pounds a month. During the following June, the 
base price of milk is $2.50 per 100 pounds and the surplus 
price is $1 per 100 pounds. During this month, Jones delivers 
5,000 pounds. How much will he receive for his June de- 
liveries? What is his average price per 100 pounds during 
June? 

2. The milk producers at Empire City operate under a 
base-surplus plan. The basic quantity is the average amount 
delivered during October, November, and December. This 
price is $3 per 100 pounds. For a surplus over this amount 
equal to 50 per cent of the basic quantity, the farmer is 
paid a lower price based on sale as cream. This price is 
$2 per 100 pounds. For the "second" surplus over this 
amount, the farmer is paid a lower price based on the use of 
the milk for manufacturing purposes. This price is $1.25 per 
100 pounds. 



314 Marketing Dairy Products 

William Brown delivers an average of 4,000 pounds monthly 
during October, November, and December. During February, 
he delivers 4,500 pounds and during May he delivers 7,000 
pounds. 

How much does he receive for his milk in February? In 
May? What is the average price in each month? 



CHAPTER 18 

Marketing Cotton 

Consumption. Cotton has supplied a large part of the 
clothing for the world's population since the introduction 
of the' cotton gin. The short fibers (linters) removed 
from the seeds are used as a raw material for making 
rayon and other cellulose products; cotton seed is used 
for making cooking fats and oils; and the meal which 
is left is used for feeding livestock. Other products of 
the fiber include tires, bags, rope, twine, tents, and awn- 
ings. In the United States the demand for cotton for 
clothing is affected by two factors: first, we wear less 
clothing than a generation ago, because of better heated 
buildings ; second, silk and rayon have come into general 
use, especially in women's clothing. 

Cotton is grown entirely for the market, the farmer 
consuming none on the farm. Cotton is our most im- 
portant commercial farm crop. More than one-half of 
the crop was exported before the recent depression and 
the curtailment of production by the Agricultural Ad- 
justment Administration. 

The cotton mills that spin the cotton into thread are 
the first consumers. Most of the American mills are 
located in the Piedmont sections of North Carolina, 
South Carolina, Virginia, and Georgia, and in southern 
New England. The southern mills consume more cotton 
than the northern mills. Foreign mills are located prin- 
cipally in western Europe, Japan, and India, although 
some other countries have important mills. 

315 



316 Marketing Cotton 

Demand. The demand for clothing is fairly steady. 
People may economize and wear their old clothes in 
times of depression and unemployment; yet in such 
times the desire for economy may also cause them to buy 
cotton garments rather than ones made of more ex- 
pensive materials. 

Production. The United States is the largest producer 
of cotton, growing about one-half of the world's crop. 
In 1930-31 we produced 54 per cent of the world's crop, 
while in 1934-35, under the curtailment program of the 
Agricultural Adjustment Administration, we produced 
only 42 per cent. The increase in price resulting from 
our curtailed production increased production abroad. 
In the first two years of the AAA's activity, our annual 
crop declined over four million bales, while the produc- 
tion in other countries increased over one million bales; 
our acreage was reduced from around 40,000,000 to under 
30,000,000. Other producing countries are India, China, 
Egypt, Asiatic Russia, Brazil, Mexico, and Peru. The 
Cotton Belt in the United States extends from Norfolk, 
Virginia, southwest to Texas and Oklahoma, and north- 
ward in the Mississippi Valley to the mouth of the Ohio 
River. Smaller belts are found in New Mexico, Ari- 
zona, and California. The annual crop in the United 
States varied from 9 to 18 million bales and averaged 
about 15,000,000 bales prior to the curtailment under 
the Agricultural Adjustment program. 

Cotton has always been grown on a relatively small 
scale because of the large amount of hand labor required 
to pick the lint from the stalks. Cotton production has 
recently spread into western Texas, however, where it is 
planted and cultivated with machines; and much of it 
is picked by snapping the bolls from the stalks with 
gloved hands, by pulling them off by sleds with wooden 



Marketing Cotton 317 

strips nailed close together on the front, or by picking 
machines which are beginning to be used. Modern gins 
can separate the lint from the hulls, leaves, and trash, 
which are gathered by snapping and sledding, although 
the lint may be of poorer grade than when picked by 
hand. 

Financing the growers. Cotton is the main money 
crop in many portions of the Cotton Belt. If the crop 
is large or the price high, the growers may be prosper- 
ous, while if the crop is poor or the price low, "hard 
times" result. 

Many of the farmers, especially the colored tenants, 
must be financed during the growing season. Local 
storekeepers and banks often loan money on the secu- 
rity of the cotton crop. From one-third to one-half of 
the value of the crop is often advanced to the growers 
during the growing season. The local merchant often 
advances food and other necessities needed by the family 
during the growing season and takes a lien on the crop. 
When the crop is harvested, it is delivered to the mer- 
chant to pay the debt, any surplus being paid for in 
cash. Under this system the local merchants are im- 
portant in the marketing of cotton. The large planters 
are often financed by the banks or by cotton factors, 
who are described in a later paragraph. 

The government-owned intermediate-credit banks 
make loans to cooperative associations and also discount 
farmers' notes. In this way they help to finance the 
growing and marketing of cotton and other crops. 

Kinds of cotton. There are three kinds of cotton: 
Upland, Egyptian, and Sea Island. Upland cotton is 
divided according to the length of the fibers into short 
staple, having fibers from % to 1 inch long, and long 
staple, having fibers from 1 to iy 2 inches long. Most 



318 Marketing Cotton 

of the American crop is less than one inch in length. 1 
The grading of cotton is known in the trade as "class- 
ing" and is done from samples taken from the bales. 
Cotton bought from the farms varies widely in quality. 
The mills want cotton of uniform quality, which means 
that cotton must be graded and arranged in even run- 
ning lots somewhere between the farm and the mill. 

Price. The price of cotton depends upon the supply, 
the general level of prices, and the demand. The de- 
mand is fairly steady. The United States is the greatest 
producer of cotton, so a relationship can ordinarily be 
found between the supply in the United States and the 
price. The supply depends upon the size of the grow- 
ing crop and the carry-over from past years. According 
to a government estimate, a crop of 12,000,000 bales 
would have (at the 1926-27 price level) a price of 30 
cents a pound, or a total value of $1,700,000,000; while 
a crop of 18,000,000 bales would be worth only 15 cents 
a pound, or $1,300,000,000. 

Country marketing of cotton. The farmers sell their 
cotton to local storekeepers, to interior or local cotton 
buyers, to the road buyers of cotton merchants, to mills, 
to gins, through factors, and through cooperative asso- 
ciations. Before it is ready for the market, the cotton 
must be ginned. 2 



1 The quality of cotton depends upon the length of the fiber, color, 
foreign matter, and its spinning properties. The United States De- 
partment of Agriculture divides cotton into 17 lengths and into 7 
colors: white, yellow tinged, yellow stained, blue stained, spotted, light 
stained, and gray. Nine grades of upland cotton are established from 
No. 1 to No. 9. Each grade also has a name. No. 1, for example, is 
known as Middling Fair, No. 2 as Strict Good Middling, No. 3 as Good 
Middling, No. 4 as Strict Middling, No. 5 as Middling, and so on. 
Linters are the short fibers removed from the seeds. 

2 Ginning is, strictly speaking, a part of production, but it is com- 
monly considered a part of marketing, since the farmer thinks of his 
cotton as ready for the market as soon as it is picked. 



Marketing Cotton 



319 



The cotton gin. The cotton gin separates the seed 
from the lint, cleans the lint to some extent, and places 
the lint in bales. About two-thirds of the weight of the 
cotton as picked consists of seeds and about one-third 
of lint. The gin operator ordinarily buys the cotton 
seed from the farmer and supplies the bagging and bands 




Fig. 28. A cotton gin. Wagons are bringing in seed cotton, and 
a number of bales of ginned cotton are waiting for the owners. 

used in baling the cotton. Present gins cost so much 
that few growers own their own gins, and most of the 
gins are operated on a custom basis, the operators charg- 
ing by the hundred pounds for ginning the cotton. The 
farmers bring the loose cotton to the gin in wagons or 
trucks. The cotton leaves the gin in bales, which com- 
monly have a density of 12% pounds per cubic foot and 
which contain 478 pounds of cotton and 22 pounds of 
bagging and ties (steel bands). Cotton for export or 
storage is often compressed into bales with a density of 
24 to 35 pounds per cubic foot. 



320 Marketing Cotton 

Country buyers. The most numerous country buyers 
are the storekeepers and the interior buyers. The local 
storekeepers take cotton in payment for goods which 
they have sold to the farmers on credit, and they also 
buy cotton for cash. The interior buyers are local dealers 
in cotton. 

There are many grades of cotton, yet the local buyers 
often pay the same ("hog round") price for all cotton 
grown in their communities. This penalizes the farmer 
with a good grade and does not encourage the farmers 
to raise a good quality of cotton. The local buyers usu- 
ally sell their cotton to road buyers of cotton merchants, 
or through cotton factors in the primary markets. 

Farmers living near cotton mills at times sell some of 
their cotton to the mills, delivering the bales on the mill 
platforms. The gins buy some cotton from the farmers. 
This is especially true in Oklahoma. 

Factors. A factor is a commission merchant. He re- 
ceives cotton on consignment from cotton planters and 
local buyers, and sells it on a commission basis for the 
account of the owner. The factor receives and inspects 
the cotton and places it in a warehouse. It is kept in 
storage until the owner orders it sold, but the owner often 
follows the advice of the factor as to the best time to sell. 

The cotton is sold by samples to merchants, mills, 
and exporters. When the cotton is sold, the factor re- 
mits the amount due to the owner with an "account 
sales" showing the price received and deductions for 
freight, storage, interest, and commission. The factors 
in one town charge a commission of 2 1 /*> per cent of the 
price received, and in another town, $1.25 a bale. 

The advantages of selling through a factor are: sell- 
ing in a large market, securing the services of an experi- 
enced salesman, obtaining the advice of the factor as to 



Marketing Cotton 321 

the best time to sell, and securing financial assistance. 
The factor advances a considerable portion of the value 
of the cotton when it is received, and the owner may 
hold it for an advance in price if he feels the price to be 
too low at the time of shipment. The factor may also 
make advances during the growing season to reliable 
planters. On the other hand, the factors have at times 
been criticized for some of their charges. Some people 
also question the need of a factor between the local 
buyer and the cotton merchant. 

Cotton merchants. Cotton merchants are wholesale 
dealers who buy from local buyers, large planters, factors, 
and others, and who sell to cotton mills or to dealers. 
The cotton merchants send their buyers on the road, and 
they usually buy in lots of 100 bales or more, but occa- 
sionally they buy smaller lots, at times buying a single 
bale from a farmer. 

The mills want to buy cotton in lots of 50 or more 
bales of uniform quality. This necessitates a grading or 
rearrangement of cotton between the local buyer and 
the mill; therefore the cotton is often concentrated by 
the merchants in primary markets, where it is graded 
and shipped to the mills in even running lots. 

Most of the cotton is sold by the farmers in the fall 
and early winter, while the mills consume it more or less 
evenly throughout the year. Cotton must therefore be 
stored a function often performed by the cotton mer- 
chant. To shift the risk of a price decline while in 
storage, the cotton may be hedged sold for future de- 
livery on the cotton exchange. The important functions 
of the cotton merchant are buying, assembling, grading, 
storing, risking, financing, and selling. 

Cooperative marketing associations. The coopera- 
tive marketing of cotton has had considerable growth, 



322 Marketing Cotton 

and, at present, approximately 250 associations market 
about 15 per cent of the crop. The more important as- 
sociations are of the centralized commodity type: the 
farmer joins the central organization and signs a contract 
for the association to market his cotton. The objectives 
of cooperative marketing are to improve the methods 
of producing and marketing cotton, and to secure higher 
prices for the farmers by reducing marketing expenses 
and by orderly marketing. 

Reducing marketing expenses. Cooperative associa- 
tions attempt to reduce marketing expenses by reducing 
the number of middlemen who handle the cotton; by 
lessening damage to the cotton at country points from 
exposure to the weather and other causes; by re- 
ducing the costs of storage and insurance; by reducing 
the expenses of grading; by reducing the expenses of 
financing ; and by reducing the costs of selling. 

The cooperative association ordinarily sells to the mills 
or to the dealers who sell to the mills; local buyers, fac- 
tors, and merchants are largely eliminated. Storing in 
better warehouses lessens damage and lowers the cost 
of insurance. For example, one association had been 
storing cotton in grade A, B, C, and D warehouses and 
paying an average insurance rate of $1.51 per $100. By 
storing in warehouses operating under the United States 
Warehouse Act and classed as AAA, the insurance rate 
was reduced to 16.2 cents. One association saved $280^ 
000 per year on insurance alone. The cooperative as- 
sociation samples a bale only once, and it is handled and 
sold on the basis of the grading thus established. Under 
the method of private sales, however, the cotton is usually 
sampled each time it is sold. The associations also save 
the samples and sweepings, and in one year ten associa- 
tions realized $169,000 from their sale. The associations 



Marketing Cotton 323 

save on capital costs by arranging for loans at low in- 
terest rates, and they attempt to reduce selling costs 
by selling in large quantities. 

Orderly marketing. The cooperative associations do 
not control enough cotton to enable them to stabilize 
prices throughout the year. They do, however, study 
statistics, store their cotton, and attempt to sell it at 
times when the price is favorable. 

Pooling. Most of the associations pool the cotton sold 
for the farmers. Thus the farmer's cotton is placed in 
a pool with other cotton of the same quality, and he is 
paid the average price received for all cotton in the pool. 
If he has 10 bales of middling fair white % inch, and 5 
bales of strict good middling white 1 inch, both lots are 
placed in the pools with other cotton of the same qual- 
ity. The farmer receives for his ten bales the average 
price received by the association for all of its middling 
fair white % inch in the pool; and for his five bales, the 
average price received by the association for all of the 
good middling white 1 inch in the pool. The farmer is 
not penalized for selling at a time when the price is low; 
neither can he profit by selling when the price is high. 

Some farmers who study the market closely feel that 
they can determine the best time to sell. They may 
object to receiving only the average price during the 
season when they feel that they could select a better- 
than-average time to sell. To meet the demand of such 
growers some associations operate pools for shorter pe- 
riods, as for one day, one week, or one month. Such 
pools allow the growers to specify when their cotton is 
to be sold. 

Purchase of cotton by the mills. The southern mills 
buy most of their cotton from cotton merchants and 
cooperative associations. The New England mills buy 



324 Marketing Cotton 

largely from dealers or brokers, who buy from or sell 
for the cotton merchants and cooperative associations. 
Most of the cotton is shipped from southern warehouses 
direct to the mills. 

The mills buy much of their cotton to fill orders which 
they have received for cloth. When they think the price 
is low or when they are offered cotton of a desired qual- 
ity, they may buy when no order for cloth has been re- 
ceived. They can protect themselves against a drop 
in price by hedging, or they can trust their judgment 
to buy when prices are low and make a profit out of a 
rise in price. In the latter case, they suffer a loss if the 
price drops. 

Chapter 18 
Review Questions 

1. What are the uses of cotton? What are its chief 
competitors? 

2. For what are linters used? 

3. What are the uses of cotton seed? 

4. What can you say of the elasticity of the demand for 
cotton? 

5. Where is cotton grown in the world? In the United 
States? 

6. Why has cotton raising been a small-scale industry in 
the past? 

7. How are the growers financed? 

8. What are the different kinds of cotton? 

9. How is cotton graded? 

10. Who are the chief consumers of cotton? 

11. What determines the price of cotton? 

12. How are cotton gin operators paid for their services? 



Marketing Cotton 325 

13. To whom do the farmers sell their cotton? 

14. How does the local storekeeper operate in the marketing 
of cotton? 

15. What is a factor? What services does the factor per- 
form in the marketing of cotton? 

16. Who are the cotton merchants? What is their place 
in the trade channel? 

17. What functions do the cotton merchants perform? 

18. How do the cooperative associations operate in the 
marketing of cotton? 

19. What are the objectives of cooperative associations? 

20. How do cooperatives attempt to reduce marketing 
costs? 

21. How do cooperatives pool cotton? 

22. Why do some growers dislike to pool their cotton? 

23. How do cooperative associations reduce insurance costs? 

24. How do the mills buy their cotton? 

25. Why do some mills speculate in cotton? How do other 
mills avoid speculating in cotton? 

Thought Problems 

1. Who are the final consumers of cotton? Can the con- 
sumption of cotton be increased? If so, how? If not, why? 
Would it be socially desirable to have the consumption of 
cotton increased? 

2. The one-crop system has been said to be the curse of 
the Cotton Belt. Diversification of crops is advocated as 
the remedy. How would diversification help the cotton 
farmers? 

3. Cooperative associations are said to benefit the farmers. 
Why have they not had a greater growth in the marketing 
of cotton? 

4. What is meant by orderly marketing? How has it 



326 Marketing Cotton 

been applied by the cotton cooperatives? How could it be 
applied? 

5. If cooperative associations controlled the marketing of 
the great bulk of the cotton crop in the United States, could 
they adopt an orderly marketing program and stabilize 
prices? If so, would this be advantageous to the growers? 
To the consumers? 

6. If such an orderly marketing program were successful, 
would there be any need for the cotton exchanges? 



CHAPTER 19 
Prices, Mark -Dps, and Margins 

Importance of selling prices. The merchant's profit 
is the difference between his selling price and the cost of 
the goods to him plus the expenses of operating his busi- 
ness. If his prices are too low, they will not cover the 
cost of goods and his expenses. If they are too high, 
his sales will decline. 

Factors affecting prices. In pricing his goods, the 
merchant should consider the cost of the goods, the ex- 
penses of selling them, the prices the consumers will 
pay for the goods, and the prices charged by his com- 
petitors. 

If a merchant sells goods for less than their cost to 
him plus his operating expenses, he will lose money. 
When competition will not permit him to raise his prices, 
he may be able to prevent a loss by buying goods at 
lower prices or by reducing his expenses. When under- 
sold by chain stores, many dealers started buying from 
cash-carry wholesalers or joined cooperative chains in 
order to secure lower prices. Buying for cash or buying 
in larger quantities may enable the buyer to secure 
lower prices. A dealer can often reduce his expenses by 
increasing his efficiency of operation, the methods of 
doing which are discussed in the following chapters. 

If a merchant places too high a price on his goods, his 
sales will decrease. On the other hand, low prices 
ordinarily increase sales. For luxuries or specialties, peo- 

327 



328 Prices, Mark-Ups, and Margins 

pie may be willing to spend liberally; for standard ne- 
cessities, on the other hand, they are likely to buy from 
the seller with the lowest price. For goods which are 
not standardized, the buyers may think that a high 
price is a sign of quality; similarly, they may hesitate to 
buy a low priced article for fear it is of inferior quality. 
Goods of known quality, however, are likely to be bought 
from the lowest priced seller who is convenient to the 
buyer. When articles are bought for display or show, 
people like to purchase goods that are known to be ex- 
pensive or which bear the label of an exclusive manu- 
facturer or dealer. 

Customary prices. Goods that are sold at the same 
prices for a long time come to have customary prices, 
that is, people associate certain prices with them. For 
many years, street car fares were five cents, and people 
objected very strenuously when higher operating costs 
forced the companies to raise their fares. Some articles 
have been sold for 5, 10, or 25 cents for so long that the 
buyers think of them as being worth only these amounts. 
When an article has a customary price, it is desirable to 
sell it at that price. It may be better to change the size 
of the package rather than the price. 

Odd and even prices. -Goods are often given even 
prices so that only one coin is necessary to make a pur- 
chase. We thus have prices of 5, 10, 25, and 50 cents, 
and one dollar. Many stores, however, use odd prices, 
such as 9, 19, 21, 39, 47, 89, and 98 cents. Such prices 
often place an article in a lower price class ; for example, 
98(5 for a dollar item places the article in the class of 
articles selling for less than a dollar. Odd prices suggest 
cut prices. A nineteen cent price suggests that the article 
ordinarily sells for twenty-five cents. A forty-seven 
cent price leads the customer to feel that the article 



Prices, Mark-Ups, and Margins 329 

usually sells for fifty cents. 1 Department stores, chain 
stores, mail-order houses, and many independent mer- 
chants have often used odd prices very effectively. Odd 
prices are so generally used for some articles that it may 
be said that the odd prices have become the customary 
prices. 

Odd prices may also suggest that the selling prices 
are arrived at accurately and not in a haphazard man- 
ner. Thus butter, eggs, and many other grocery items 
are commonly priced in odd cents. 

Quantity prices. The seller often gives a lower price 
on the sale of a large quantity than on the sale of a small 
quantity. The manufacturer may give a lower price on 
a carlot sale than on the sale of a single case, and the 
buyer who purchases $50,000 a year may obtain a lower 
price than if he bought only $1,000. 

The retailer may use quantity prices to increase the 
size of his sales: a 10 ceijt article may be priced at $1 
a dozen. The use of quantity prices may increase the 
average size of sales, even though there is no reduction 
in prices. Thus, instead of marking his goods at five 
cents each, the retailer may mark them at 10 for 50 
cents, thus suggesting a purchase of 10 units. Some 
retailers have been successful in selling oranges by the 
bushel and peck; bushel and peck prices suggest the 
purchase of these lots to obtain lower prices. 

Leaders. Stores often place very low prices on certain 
articles which are used as leaders. At times leaders are 
sold below cost; they are then known as loss leaders. 
Leaders are used to attract customers to a store, in the 



1 Another^ reason for odd prices is that the customers do not ordina- 
rily present the correct change. The salesperson must then ring up 
the snle on the cash register or make out a sales slip in order to make 
change. This lessens the opportunity for dishonesty by the salesperson. 



330 Prices, Mark-Ups, and Margins 

hope that they will buy other goods on which the dealer 
makes a profit. Leaders have been used very success- 
fully by department, chain, and many independent 
stores. Goods used as leaders are usually widely used 
staple goods of known quality, such as overalls, adver- 
tised toilet articles, sugar, flour, soap, canned goods, 
butter, and potatoes. 

Theory of using leaders. The theory of using leaders 
is to sell well-known or standard goods at low prices 
and make a profit on other goods that will bear a larger 
mark-up. It is said that the public know the quality 
of only a few goods and that they compare prices on 
relatively few articles. For this reason, it is argued that 
by naming low prices on a few articles, the dealer can 
attract customers and then make a nice profit on the 
rest of his goods. 

Many people feel that every item should carry a 
mark-up large enough to cover its cost and the expense 
of selling. It seems unfair to overcharge the buyers of 
some articles to make up for losses on articles sold to 
other customers. It would seem that every article should 
carry a profit, yet competition may prevent the merchant 
from pricing all of his goods to do so. Although the 
practice appears unfair, it must be admitted that some 
sellers have used low priced leaders very successfully in 
building up sales and making profits. 

The one-price policy. A one-price policy means that 
the seller has the same selling prices to all buyers. 

Historically this is a relatively new policy. Formerly 
merchants commonly marked their goods in code, and 
haggling over prices was common. The dealer would 
ask a higher price than he expected to receive, and the 
buyer would offer a considerably lower price. A battle 



Prices, Mark-Ups, and Margins 331 

of wits, words, and endurance followed, and the price 
finally paid depended largely on the relative bargaining 
ability and perseverance of the buyer and seller. Such 
"horse trading" tactics were common in the sale of all 
commodities, and many buyers and sellers prided them- 
selves upon their shrewdness in trading. The practice 
of higgling over prices is still common in many parts 
of the world. In the Orient, for example, a seller often 
asks several times the amount he is willing to accept for 
his goods. 

The one-price policy was popularized in the United 
States by such great merchants as A. T. Stewart in New 
York, John Wanamaker in Philadelphia, and Marshall 
Field in Chicago during the middle portion of the last 
century. Its spread was somewhat slow, but most re- 
tail stores now use it. Yet cutting prices on the larger 
commodities is still common, and higgling over prices is 
still common, especially in the wholesale markets. Hig- 
gling over prices is expensive, as it takes the time of 
both buyer and seller. When accustomed to uniform 
prices, the buyer may become suspicious of a cut-price 
article, feeling that its quality is poor. 

Determining selling prices. When the dealer receives 
goods, he ordinarily adds enough to their cost to cover 
his operating expenses and leave a profit. What the 
buyers will pay for the articles and the prices charged 
by competitors, however, often modify the figures ar- 
rived at in this way. On some articles, the selling price 
may allow a large profit; on other articles, the dealer 
may have to take a loss. The amount added to the cost 
of an article to secure the selling price is known as 
mark-up. The difference between the price actually re- 



332 Prices, Mark-Ups, and Margins 

ceived for an article when it is sold and its cost is known 
as margin, gross margin, or gross trading profit. 

Mark-up. The merchant adds a certain percentage of 
mark-up to the cost of goods in order to arrive at a sell- 
ing price. This percentage should be computed on the 
selling price. To illustrate, a merchant buys an article 
for 36 cents. He has operating expenses of 20 per cent, 
and wants to make a 5 per cent profit; he, therefore, 
wants to mark his goods with a selling price that will 
yield a 25 per cent mark-up. If, erroneously, he figures 
the mark-up on the cost, he takes 25 per cent of 36 
cents, which is 9 cents, and adds this 9 to the 36, which 
gives him a selling price of 45 cents. But his operating 
expenses are 20 per cent. Figuring twenty per cent of 
the selling price of 45 cents, we have 9 cents the figure 
that the merchant had intended to cover both 20 per 
cent operating expense and 5 per cent profit. His 
mark-up, however, merely covers his operating expenses 
and leaves him no profit. Many dealers make this mis- 
take and then wonder why they have no profit. 

The correct method of figuring mark-up. The correct 
method is to set the price so that a 25 per cent margin 
is realized on the selling price. To do this, we let the 
selling price equal 100 per cent. We want a 25 per cent 
margin, so we subtract 25 from 100; this leaves 75 per 
cent, which equals the cost of the article. Now if 75 
per cent is equal to 36 cents, then 100 per cent is equal 
to 48 cents, the correct selling price. The difference be- 
tween 48 cents (the selling price) and 36 cents (the 
cost) is 12 cents. Twelve cents is 25 per cent of the sell- 
ing price, and it covers the 20 per cent expenses and 
allows a 5 per cent profit. 

The rule is to deduct the desired percentage of 



Prices, Mark-Ups, and Margins 333 

mark-up from 100; divide the cost of the goods by the 
remainder; and multiply the quotient by 100. 2 Thus: 

Per Cent 

Selling price 100 

Desired percentage of mark-up 25 

Cost of the article 75 

75 per cent =36 cents; 1 per cent =0.48 cents; 
100 per cent =48 cents, the selling price. 

Short cuts, of course, are used. To secure a 50 per 
cent mark-up, divide the cost by 5 and move the decimal 
point one place to the right; to secure a 40 per cent 
mark-up, divide the cost by 6 and move the decimal one 
place to the right; to secure a 30 per cent mark-up, di- 
vide by 7 and move the decimal point; to secure a 25 
per cent mark-up, divide by 7.5 and move the decimal 
point; to secure a 20 per cent mark-up, divide by 8 and 
move the decimal point; to secure a 33 % per cent 
mark-up, divide the cost by 2 and multiply by 3. Tables 
are prepared which show the selling price of articles with 
different costs to yield various percentages of mark-up. 
Such tables enable dealers to mark their goods correctly 
without the work of computing the price of each article. 

What is cost? Cost is the price paid for an article, 
plus the expense of getting it to the merchant's place of 
business. The cost includes the payments for freight, 
express, postage, drayage, and any costs of loading, un- 
loading, and packing paid for by the buyer. 

2 Twenty-five years ago, many arguments were made for computing 
mark-up on cost. Research bureaus, government departments, trade as- 
sociations, and universities, however, practically all agree that mark-up 
should be computed on selling price. Expenses included in salesman's 
commissions are nearly always figured on sales. To compute expenses 
on selling prices and mark-up on cost prices is likely to be not only 
misleading but disastrous to the dealer's profit. 



334 Prices, Mark-Ups, and Margins 

To secure at the cost price, all trade discounts 3 are 
deducted from list price. Quantity discounts are also 
usually deducted when they are given at the time of pur- 
chase. Sometimes quantity discounts are based on the 
total purchases made during a given period, such as a 
month or a season. When this is the case, the exact 
amount of the discount is not known at the time the 
goods are received and placed on sale. 

There is a difference of opinion as to whether cash 
discounts should be deducted in arriving at the cost of 
the goods. A cash discount is an allowance for paying 
a bill within a certain time. Cash discounts are com- 
monly allowed on purchases made at wholesale but are 
not usually allowed on retail sales to the consumers. A 
common rate of discount is 2 per cent for payment within 
10 days of date of sale (invoice), the bill being due at 
its face amount in 30 days. These terms are usually 
expressed thus: 2/10, n/30. If a merchant buys $100 
worth of goods on these terms on January 1 and pays 
for them on January 10, he pays only $98. If he does 
not pay on or before January 10, he is not entitled to 
any discount. The bill is due at its face value of $100 
on January 30. 4 The extra $2 is in the nature of a 
penalty for slow payment. 

3 Trade discounts are deductions from list prices. They are sub- 
tracted from the list price one at a time so that the buyer is never 
charged with them. The list price may be the price to the ultimate 
consumer, while a trade discount is given the retailer for his margin. 

4 Some common terms are: 2/10, n/30; 1/10, n/30; 2/10, n/60; 2/10, 
1/30, n/60; V2/10, n/30; and 2/10, n/30 e.o.m. E.o.m. means "end of 
month." In some trades the dealers make so many small purchases 
that the rendering of separate bills and the making of separate collec- 
tions on each purchase would involve much work for both seller and 
buyer. Hence it is common, in such trades, to invoice all purchases 
made during the period at the end of the period. An invoice is ren- 
dered at the end of the period and the terms apply from that date. 
Thus under terms of 2/10, n/30 e.o.m., the buyer is allowed to take 



Prices, Mark-Ups, and Margins 335 

Mark-downs. Goods are not always sold at the 
marked price. When goods do not sell within a reason- 
able time, the dealer may change their location in the 
store, may give them a more prominent display, may 
place them in the show windows, may advertise them in 
the newspapers, may instruct the salespeople to use 
special effort to sell them, or he may reduce their prices. 
Some stores have a definite policy of reducing the prices 
of all articles that do not sell within a certain period 
after they are placed in stock. 

Goods may also be marked down because they become 
soiled or shelf worn, because they are going out of fash- 
ion, because competitors reduce their prices, because 
market prices decline, or because the dealer is over- 
stocked. 

Margin. The margin actually realized on the sale of 
goods is ordinarily less than the mark-up placed on them. 
Some goods are marked down; some are stolen; others 
decay or spoil, so that they are a complete loss. Such 
mark-downs and losses reduce the margin. 

Determining the mark-up percentage. All of these 
factors must be taken into consideration in determining 
the mark-up that should be placed on goods. The 
mark-up percentage varies with the goods. The cost 

2 per cent discount on the month's purchases if he pays the bill by 
the 10th of the following month. The period may be a week or one- 
half of a month. Wholesale grocers and druggists often use half-months 
or months as the accounting period for sending out bills. Retail 
stores often send statements weekly or monthly, covering purchases 
made during the week or month. Many other terms are used. In 
some cases terms apply from the season in which the goods are to be 
sold. In the apparel trades, manufacturers like to obtain advance 
orders to keep their plants in operation. Thus on spring orders, the 
manufacturer may make and ship the goods in the late winter, but the 
invoice may be dated on April 1 or May 1, from which date the terms 
apply. The retailers may be allowed from 60 or 90 days from the date 
of the invoice to make payment. 



336 Prices, Mark-Ups, and Margins 

of selling groceries is less than the cost of selling cloth- 
ing; groceries are therefore given a lower mark-up than 
clothing. The mark-up placed on different articles by 
the same dealer often varies widely. Some items have 
a very slow turnover, which means a higher expense; it 
is natural, therefore, to place a higher mark-up on such 
goods. Goods used as leaders may have a low mark-up. 
Goods that are not highly competitive are likely to bear 
a larger mark-up than those which are highly competi- 
tive. Specialties often bear a higher mark-up than 
staples. Nails, sugar, and overalls are examples of com- 
petitive staple articles that are commonly given very 
low mark-ups by the retailers. 

Mark-downs are more important with style goods 
than with staples. Goods with a high style risk are 
usually given a high mark-up to allow for the mark- 
downs of those that do not sell promptly. 

The merchant giving credit and delivery service usu- 
ually has higher expenses than the merchant selling on 
a cash-carry basis and may therefore mark his goods for 
a higher margin. Dealers in goods sold on long credit, 
such as farm equipment, furniture, and musical instru- 
ments, may have two prices on their goods, one for 
credit and one for cash. At times they mark their goods 
on a credit basis and give a lower price for cash ; at other 
times, they mark their goods for cash and charge extra 
for credit. This latter practice is common in the sale of 
automobiles and trucks when credit is extended by fi- 
nance companies. 

Dealers in large cities usually have higher expenses 
than dealers in the smaller towns, and hence use a higher 
percentage in marking their goods. 

The dealer's total margin. The dealer's total margin 
is the sum of the margins made on all articles sold. It 



Prices, Mark-Ups, and Margins 337 

is the difference between sales and the cost of goods sold. 
The cost of goods sold is determined by adding purchases 
and opening inventory and by deducting the closing in- 
ventory. Margin is computed as follows: 

Sales for the period $40,000 

Inventory at the beginning of period. $10,000 

Purchases 30,000 

Transportation (freight, express, 

postage, drayage) 500 

Total to be accounted for. . . $40,500 

Inventory at the close of the period . . 10,500 

Cost of goods sold 30,000 

Margin $10,000 

The margin here is $10,000, or 25 per cent of sales. 

Effect of mark-downs. A dealer buys 1,000 pairs of 
shoes for $3.00 a pair, or a total of $3,000. In order to 
make a 40 per cent mark-up, he prices them at $5.00. 
He sells 700 pairs at $5.00 and receives $3,500. Before 
he sells the other 300 pairs, the manufacturer reduces 
his price to $2.40, and a competitor offers his shoes at 
$4.00. The dealer therefore reduces the price on the 
other 300 pairs to $4.00. He sells 200 pairs at this price 
and receives $800. The other 100 pairs do not sell at 
this price, and he therefore advertises them in a clear- 
ance sale for $2.00. He realizes $200 for them at this 
price. His total margin on the 1,000 pairs of shoes is 
$1,500. 

Sales: 

700 pairs sold at $5.00 $3,500 

200 pairs sold at $4.00 800 

100 pairs sold at $2.00 200 

Total. ... $4,500 

Cost of goods sold, 1,000 pairs at $3.00 . 3W_ 
Margin $1^500 

The dealer's total margin of $1,500 on the 1,000 pairs 
of shoes was 33% per cent. He priced them for a 40 



338 Prices, Mark-Ups, and Margins 

per cent margin, but mark-downs reduced his margin to 
33% per cent. 

Replacement costs. There has been considerable dis- 
cussion of whether or not the dealer should change his 
selling prices when the wholesale market prices of the 
goods change. Dealers seldom re-price all of their goods 
every time cost prices change. They leave the same prices 
on the goods until it is necessary to reduce the prices to 
sell them or until they buy some new stock. Some ar- 
gue, however, that when the market price (the replace- 
ment cost) of the goods rises, the merchant should go 
over his stock and raise his prices to the figures that they 
would be if he had bought at the advance price. The 
advocates of this policy say that the dealer should do 
this to compensate for mark-downs which he must take 
when prices fall. 

In the illustration given above, the shoe dealer marked 
down the price on 300 pairs of shoes because the manu- 
facturer's price was reduced. Suppose the manufacturer 
raises his price to $3.60. Now if the dealer followed the 
policy of changing his prices on the basis of replacement 
costs, he would have marked up the price of the shoes to 
$6.00. If he had sold 200 pairs at this price, he would 
have increased his margin by $200. This would have 
been a clear profit to him, arising out of changes in mar- 
ket prices over which he had no control. 

In periods of rising prices, dealers make profits in just 
this way out of increased values of inventories. On 
the other hand, when prices fall, dealers must often take 
losses on their inventories. This helps explain why pe- 
riods of rising prices are profitable and periods of falling 
prices unprofitable to merchants. 5 

5 It must not be inferred from this that all or even the majority of 
dealers make a practice of remarking their goods every time prices 
change. The shoe dealer in the above illustration probably would not 



Prices, Mark-tips, and Margins 339 

Variation in margins. The margins realized by dif- 
ferent dealers vary widely. The margins of a group of 
238 rural dealers varied as shown in Table 26: 

TABLE 26. VARIATIONS IN MARGINS OF A GROUP OF 
RURAL STORES HANDLING FARM EQUIPMENT 

Percentage of Number of 

Margin Dealers 

Under 10 12 

10-12 16 

13-15 28 

16-18 56 

19-21 57 

22-24 38 

25-27 18 

28-30 9 

Over 30 4 

238 

Average margins. Average margins realized by 
groups of different kinds of stores are given in Table 27 
from figures in typical surveys: 

TABLE 27. AVERAGE MARGINS FOR VARIOUS 
KINDS OF STORES 

Retail stores: Per Cent 

Grocery (service) 19.0 

Hardware 26.0 

Shoe 29.0 

Large department 35.0 

Small department . . . 32.0 

Jewelry ... 40.0 

Tire and auto accessory 24.0 

Wholesale stores: 

Grocery (service) 13.0 

Drug 17.0 

Automotive equipment . . . 25.0 

Plumbing 22.5 

Wall paper 42.5 

Dry goods 18.0 

Hardware 20.0 

change the prices of his shoes immediately upon hearing of the manu- 
facturer's change in price. He would probably leave the price un- 
changed until he buys more shoes. When he places his newly purchased 
shoes on sale he must change the prices on the shoes in stock or 
offer the same shoe at two different prices. 



340 Prices, Mark-Ups, and Margins 

Chapter 19 
Review Questions 

1. What determines a merchant's profit? 

2. What factors does a merchant consider in naming his 
prices? 

3. What is the danger of a high price? Of a low price? 

4. What is meant by customary price? Its importance 
to the seller? 

5. What is meant by an even price? What is its ad- 
vantage? 

6. What is meant by an odd price? What is its ad- 
vantage? 

7. What is meant by quantity prices or discounts? 

8. What is meant by a leader? By a loss leader? 

9. Why are leaders used? Ts it good business to use price 
leaders? 

10. What is meant by mark-up? 

11. What factors determine the proper percentage of 
mark-up? 

12. What is the correct rule for computing mark-up? 

13. What is meant by the cost of goods to a dealer? 

14. What is a trade discount? 

15. What is a cash discount? Illustrate. 

16. What is meant by a mark-down? 

17. Why are goods marked down? 

18. What is meant by margin? What are other names for 
margin? 

19. How is a dealer's margin computed? 

20. How do mark-downs affect a dealer's margin? 

21. What is meant by replacement cost? 



Prices, Mark-Ups, and Margins 34] 

22. A dealer buys shoes at $4.20 a pair. What is thi 
selling price for a 40 per cent mark-up? For a 30 per cen 
mark-up? For a 33% per cent mark-up? For a 50 pe 
cent mark-up? 

23. A dealer buys dresses at $9.00 each. What is thi 
selling price for a 33% per cent mark-up? For a 50 pe 
cent mark-up? 

24. A dealer buys shirts at $12 a dozen. What must th< 
selling price for each be to realize a 25 per cent mark-up 
A 30 per cent mark-up? A 40 per cent mark-up? 

25. A dealer buys lettuce (5 dozen heads to the case) a 
$2.40 a case. What is the selling price per head to realizi 
a 33% per cent mark-up? A 20 per cent mark-up? A 51 
per cent mark-up? 

26. A grocer buys sugar at 4 1 /^ a pound. What is th< 
price for a 10 per cent mark-up? 

27. A grocer buys sugar at 4^ a pound and pays freigh 
and dray age at the rate of 51.2^ per 100 pounds. What i 
the selling price per pound for a 6 per cent mark-up? 

28. A grocer buys oranges at $5.40 a crate. He pays 36< 
per crate for having the oranges hauled to his store, an< 
there are 216 oranges in each crate. What is the selling pric< 
per dozen to realize a 33% per cent mark-up? 

29. A dealer buys 100 suits at $40 less 40 per cent trad 
discount. He pays $30 express charges on the suits. Wha 
is the selling price of each suit for a 40 per cent mark-up? 

30. Dealer Brown had an opening inventory of $4,000 
He makes purchases of $40,000 and pays transportatioi 
charges of $1,000 on his purchases. At the end of the year 
his inventory was $3,000. During the year his sales wen 
$60,000. What was his margin in dollars? In percentage? 

Thought Problems 

1. When is a price high? When is a price low? 

2. Why are trade discounts used? 

3. Why are cash discounts given? Should a cash discoun 



342 Prices, Mark-Ups, and Margins 

be considered as a reduction in the purchase price or as a 
financial gain that should be added to profit? 

4. A cash discount of 2/10, n/30 is said to be equal to 
36 per cent a year. How is this 36 per cent computed? It 
is said that money is not worth 36 per cent. If so, why are 
such large discounts given? 

5. Should a merchant make a practice of changing the 
prices of goods in stock when the market prices of these 
goods change, that is, should he base his prices on replacement 
costs? Why or why not? Give arguments on both sides. 

6. A store selling wearing apparel for women marks down 
the price of all unsold goods 25 per cent at the end of two 
weeks. A dress priced at $16 is marked down to $12 if 
it is unsold at the end of two weeks. If unsold at the end 
of four weeks, the price is reduced to $9. If unsold at the 
end of six weeks, it is reduced to $6.75. This method is 
continued until the dress is sold or given away. Comment on 
this method of making mark-downs. 

7. Another dealer in women's wear says that what a 
garment costs has nothing to do with its selling price. Once 
purchased, the garments must be sold for what they will 
bring. He therefore gets the advice of his sales women and 
marks his goods with the prices which he feels the consumers 
will pay for the various garments. If the garments do not 
sell at this price, they are marked down. Comment on this 
method of naming prices. 

8. A dealer in men's furnishings bought a bargain lot of 
fancy scarfs for his Christmas trade. He priced the scarfs 
at $2, a very reasonable mark-up for quick sale. At this 
price, they were an exceptionally good value to the consumers. 
They did not move at this price. As Christmas approached, 
the dealer became worried and marked up the price to $4. 
They sold quickly at this price. Under what circumstances 
will a higher price increase sales? 

9. Why do the margins of similar dealers vary so widely? 

10. A dealer buys hats at $5 each on the following terms: 
5/30, 3/60, 2/90, n/120. He pays for the hats within 30 



Prices, Mark-Ups, and Margins 343 

days. What is the selling price for a mark-up of 40 per cent? 

11. A manufacturer offers the following quantity discounts: 
1-9 cases, net; 10-49 cases, 2 per cent discount; 50-99 cases, 
3 per cent discount; 100-399 cases, 4 per cent discount; 400 
cases (carload), 5 per cent discount and prepaid freight. 
Terms are 2/10, n/30. A dealer buys 400 cases and pays 
within 10 days. A case contains 24 items. The quoted 
price is $2.70 per case. What is the selling price per item 
for a 25 per cent mark-up? 

12. A manufacturer quotes knives at $6 a dozen with the 
following discounts, 30 and 20. What is the selling price of 
a knife to yield the dealer a 50 per cent mark-up? 

13. In figuring mark-ups, the selling price frequently comes 
out an odd figure. Many dealers mark the price at the 
nearest even or customary figure. It is said that this practice 
causes many small losses and cuts heavily into profit, and 
that a dealer should use the exact odd prices. What is your 
opinion? 

14. What is meant by e. o. m. terms? Why are they used? 



CHAPTER 20 

Operating Expenses 

Expenses. In the operation of his business a mer- 
chant is bound to incur expenses. He must pay salaries 
and wages to his employees, rent for the building oc- 
cupied, and taxes and insurance on his goods and fix- 
tures. He must pay for advertising, light, heat, wrapping 
paper and supplies, delivery of goods, telephone service, 
and depreciation on his store fixtures. Bad debt losses 
are also considered as an expense. The merchant or- 
dinarily includes his own salary as an expense. This is 
considered good practice, but the difficulty is that the 
merchant is not an impartial judge of the value of his 
own services. 

Rent on owned buildings. When the merchant owns 
his own store building, he may charge himself rent on 
the building, just as if he rented it from another. In 
this case the taxes and depreciation on the building, and 
interest on its value or on the mortgage must not be 
included in expenses. To do so would be to include the 
expenses of the building twice. 

Interest. Interest upon the owner's capital invested 
in a business is sometimes included in operating ex- 
penses and at other times is excluded from expenses and 
considered as a part of profit. 

Classification of expenses. The expenses may be 
classified in several ways. The most common method in 
the past has been to classify them in the way the ac- 
countant ordinarily kept the books. This has been called 

344 



Operating Expenses 345 

the natural classification, as the expenses are grouped 
according to the purpose for which they were made 
for salaries, rent, advertising, taxes, insurance, repairs, 
and depreciation. 

The operating classification groups expenses according 
to the departments of the business or according to the 
functions performed, as, for example, administration, 
publicity, buying, and selling. This grouping helps the 
merchant to analyze his business. Ordinary accounting 
merely tells the dealer whether or not he is making 
money on his total business. He is very often making 
money on some departments or on some goods and losing- 
money on other departments. Cost studies have shown 
that many business concerns were losing money on many 
of their customers, on many of their products, and in 
many territories. 1 In many cases a thorough analysis 
of expenses has shown that the dealer was pushing the 
sale of goods on which he W T RS losing money. 

Form of operating statement. A form of operating, 
or profit and loss, statement is shown in Table 28 cov- 
ering the operations of department stores with sales of 
$600,000 (see page 346). 

It will be seen from the statement that this store had 
gross sales of $636,600, but that goods returned by the 
customers and allowances made to customers amounted 
to $36,000. This left net sales of $600,000. Net sales 
are taken as 100 per cent in the computation of all per- 
centages, except those of earnings or income on capital. 
The cost of goods sold (purchases with inventory ad- 
justments) was $396,000. This left a margin of $204,000, 
or 34 per cent. Expenses, including interest, amounted 

1 A third method of classifying expenses is according to productive 
factors as listed by economists land, labor, capital, and management. 
Very little practical use has as yet been made of this classification. 



346 Operating Expenses 

TABLE 28. FORM OF PROFIT AND LOSS, OR OPERATING, 
STATEMENT COVERING DEPARTMENT STORES* 

f Dollars ^ Percentages 

Gross sales $636,600 

Less returns and allowances 36,600 

Net sales $600,000 100.0% 

Inventory (goods in stock), Jan. 1 $160,000 
Purchases: $373,900 plus transporta- 
tion on goods of $6,600 1 380,500 

Cost of goods handled $540,500 

Inventory, December 31 144,500 

Cost of goods sold 396,000 66.0 

Margin $204,000 34.0 

Operating expenses: 

Salaries and wages $101,400 16.9 

Rent 27,000 4.5 

Advertising 15,600 2.6 

Loss from bad debts 1,500 .25 

Insurance on stock and fixtures. . 2,700 .45 

Taxes on stock and fixtures . ... 3,600 .6 
Interest on investment, excluding 

building ... 13,800 2.3 

Other expenses 24,000 4.0 

Total, including interest 189.600 31.6 

Operating or net profit $ 14,400 2.4 

Other incomes f 6,600 1.1 

Net income (or profit) over and above 

interest on investment. 21,000 3.5 

Net earnings or income, including 

interest on investment. 34,800 5.8 

Net earnings or income on capital. 12.3 per cent 

*Figures adapted from report of Harvard Bureau of Business Research 
for stores with sales between $500,000 and $2,000,000. 

|Cash discounts received were deducted from purchases. 

to $189,600, or 31.6 per cent. The operating profit 
amounted to $14,400, or 2.4 per cent. The net income 
(or profit) after adding other income was $21,000, or 
3.5 per cent. In order to compute the earnings on invest- 
ment, we add the interest of $13,800 included in ex- 
pense. This gave $34,800, which was equal to 12.3 per 
cent of the invested capital. 



Operating Expenses % 347 

In the above statement, cash discounts taken on pur- 
chases were deducted from the purchases. If this is not 
done, such discounts are included in "other income/' 
and added to the operating profit to obtain the net in- 
come. 

Variation in expenses. The dealer's expenses vary 
with the kind of goods handled, with his location, with 
the services rendered his customers, with his volume of 
sales, with changes in the price level, and with his ef- 
ficiency. 

It costs more to sell drugs than to sell groceries, and 
it costs more to sell furniture than drugs. The expenses 
vary with the time and effort required to make sales, 
with the size of the individual sales, with the space oc- 
cupied by the goods, with the services rendered, and with 
the rate of stock turnover or the length of time goods are 
carried in stock before being sold. Groceries are con- 
venience goods and people do not ordinarily shop for 
them. This means that the salespeople do not have to 
wait for the customers to make up their minds what they 
want. The grocer has a relatively high rate of stock 
turnover. 

The drug store handles convenience goods to a very 
large extent, but the druggist must carry a great variety 
of goods in stock, which slows up his rate of turnover. 
Goods sold at the soda fountain and in the prescription 
department require personal service. For these reasons 
the druggist has higher expenses than the grocer. 

The furniture merchant sells in large units, but his 
merchandise is bulky and requires a large amount of 
space, thus increasing his expense. People shop for fur- 
niture, which means that the salesmen must show furni- 
ture to many people who make no purchases; this adds 



348 Operating Expenses 

to the selling expenses. Sales are likewise irregular, 
thus necessitating periods of idle time which limit the 
sales per salesman. The quantity of goods required for 
a complete stock, and the seasonal nature of the busi- 
ness, slow up the rate of stock turnover and increase 
expenses. 

Retail establishments that repair or make goods (such 
as jewelry, radio, plumbing, and electric shops; garages; 
and restaurants) have their expenses increased by the 
extra amount of labor required. 

Average expenses of wholesalers and retailers in vari- 
ous trades were given in Chapters 7 and 8. 

Services rendered. The services rendered customers 
affect the dealer's expense. The store extending credit 
liberally and delivering its goods has higher expenses 
than the store operating on a cash-carry basis, other 
things being equal. The self-service store usually has 
lower expenses than the store employing salesmen. The 
store having expensive fixtures, rest rooms, writing 
rooms, and a liberal policy in allowing goods to be re- 
turned will ordinarily have higher expenses than a store 
giving less service. 

It has been estimated that it costs retail grocery and 
hardware stores from 5 to 8 per cent for credit and de- 
livery service on goods sold on that basis. The cost of 
credit includes the interest on outstanding accounts; the 
losses from bad debts; the labor in keeping books and 
the cost of making collections sending out statements 
and collection letters; and the use of personal collectors, 
lawyers, and collection agencies. Very few stores, how- 
ever, do all of their business on credit, and very few 
deliver all of their goods. For these reasons the cost of 
credit and delivery service to most grocery and hard- 



Operating Expenses 349 

ware stores is less than 5 per cent when computed on 
total sales. 2 

Operating efficiency. Differences in the efficiency of 
different merchants in trade account for more of -the 
variation in their expenses than any other single factor 
than the services rendered the consumers, differences 
in location, volume of sales, or changes in price level. 
A merchant's efficiency is shown by his selection of 
goods, by the location of his store and the way he uses 
the space, by the way he displays his goods, by the sales- 
manship used in selling the goods, by the way he adver- 
tises, and by the rapidity with which he turns over his 
stock of goods. 

The variation in the expenses of similar dealers is i] 
lustrated by the figures in Table 29 which cover a group 
of rural merchants: 



TABLE 29. VARIATION IN EXPENSES OF A GROUP 
OF RURAL STORES 



Percentage of 
Operating 
Expense 

Under 5 


Number of 
Dealers 

8 


5-7 


15 


8-10 


39 


11-13 


43 


14-16 


50 


17-18 


46 


20-22 


14 


23-25 


8 


Over 25 


15 



238 



2 Figures compiled by The Progressive Grocer for successful food 
stores in 1934 show the following average expenses: super-market on 
service basis, 18.2 per cent; super-market on cash-carry basis, 13.8 per 
cent; super-market on cash-carry self-serve basis, 12.1 per cent; service 
stores, 16.7 per cent; cash-delivery stores, 17.5 per cent; cash-carry 
stores, 16.4 per cent; cash-carry self-serve stores, 12.6 per cent. 



350 Operating Expenses 

Method of measuring efficiency. In order to succeed, 
a merchant must be at least as efficient as his competi- 
tors, and to be an outstanding success he must be more 
efficient than they. One method of measuring efficiency 
is to place one's accomplishments alongside those of 
others engaged in the same line of business. A mer- 
chant's accomplishments are set forth in his operating 
(or profit and loss) statement. A merchant can measure 
his relative efficiency by comparing his operating state- 
ment item by item with a composite statement showing 
average figures for a group of similar merchants. This 
method indicates which of his expenses are high, which 
are average, and which are low. It will show whether 
his margin is high or low and how his profit compares 
with that of other dealers in the trade. Some merchants 
want to be better than average. They may compare 
their operations with the operations of a superior mer- 
chant or with statements covering a group of superior 
merchants. 

John Smith as an example. We shall illustrate the 
method with the operating statement of John Smith, 
who conducts a retail hardware store with sales of $75,- 
000 a year in a town of 5,000 population. His statement 
is compared below with statements for dealers with sales 
of $60,000 to $100,000 located in towns of from 3,500 to 
10,000. John Smith's operations are compared in Table 
30 with both the average performance of the entire 
group and the average of the merchants making a 
profit. 

What Smith finds. Upon examining these statements, 
Smith finds that his margin is higher than the 
average of the group and also higher than that of the 
better stores. 

Smith's expense for rent is higher than those shown 



Operating Expenses 



351 



TABLE 30. OPERATING RESULTS OF RETAIL HARDWARE 

STORES WITH SALES OF $60,000 TO $100,000 IN TOWNS 

OF 3,500 TO 10,000* 



Group 
Average 

Sales 100.0% 

Cost of goods sold 73.9 

Margin . 26.1 

Expenses: 

Salesmen's salaries 

Total salaries .... 

Rent 

Delivery 

Advertising . . 

Loss from bad debts 
Interest on borrowed money 
Other expenses .... 

Total . . 

Operating profi^ 

Cash discount and interest received 
Net profit, before payment of in- 
terest on investment 
Interest on owner's investment 
Net profit, or income, above inter- 
est on owner's investment 
Net profit (earnings or income) per- 
centage of owner's investment 
Annual sales per actual salesman $1 7,346 
Annual sales for all persons in the 

store (average) $11,830 

Percentage of sales made on credit 58^ 

Days credit sales on books (num- 
ber of days required to collect 

accounts) . 109 

Number of stockturns per year . 2.3 
Annual salary per salesman . $1,078 

Salary of owner $2,083 

Owner's investment per $10,000 

sales $4,872 



A verage for 
Stores Mak- 
ing a Profit 
100.0% 
73.6 
27.9 



79 


7.7 


11.7 


11.4 


2.7 


2.5 


J.4 


1.3 


0.9 


0.9 


1.1 


1.1 


0.6 


0.5 


38 


3.9 


22.2 


"216" 


3.9 


6.3 


1.5 


1.5 


5.4 


7.8 


2.9 


2.9 



2.5 



11.2 



4.9 

16.1 
$17,251 

$11,770 

57% 



120 
2.4 

$1,073 
$2,089 

$4,859 



*Figures for average and profitable stores are from reports 
Retail Hardware Association. 



John Smith's 
Store 

100.0% 
70.9 
29.1 

10.1 
15.1 

4.4 

1.9 

1.3 

0.6 

0.5 

4.5 

"28.3 
0.8 
1.3 

2.1 
3.4 

LSloss 

3.7 
$14,071 

$9,375 
51% 



92 
2.0 

$1,355 
$2,400 

$5,654 
of the National 



for the other dealers. He has more space than he needs, 
or he is paying too much rent for his building. His de- 
livery and advertising expenses are high. His expenses 
for loss from bad debts are below those of the other 



352 Operating Expenses 

dealers. Smith's total expenses are six per cent higher 
than the average for the group and nearly seven per 
cent above those of the better dealers. The cash dis- 
counts taken on purchases and the interest received on 
notes and accounts receivable are slightly below the 
average. This indicates that he did not take the dis- 
counts on all purchases. 

After deducting interest, John Smith showed a deficit. 
However, he earned 3.7 per cent on his investment, com- 
pared with an average of 11.2 per cent for the group and 
16.1 per cent for the better merchants. Smith sold less 
on credit than the average and collected his accounts 
somewhat more quickly than the average. 

Smith has too much money invested in goods ; he does 
not turn his stock rapidly enough. He has only two 
stockturns per year compared with an average of 2.3 
for the group and 2.4 for the selected stores. He has 
more capital in proportion to sales than the average. 
In spite of this, he did not receive the average amount 
of cash discount and interest. Smith should reduce his 
expenses for rent and delivery; he should increase his 
rate of stock turnover; and he should watch his invoices 
more closely and pay his bills promptly so as to secure 
more cash discounts. By reducing his stock of goods, 
he will have more money available with which to take 
cash discounts. 

The outstanding trouble with Smith's business is the 
poor showing made by his salesmen. Their annual sales 
are $14,071 each $3,275 (19 per cent) below the av- 
erage. He also pays his men higher than average sal- 
aries. He has too many salesmen for his volume of 
sales. He should either let one of them go or increase 
his volume of sales. Smith apparently has five sales- 
men and spends a part of his own time in selling. If he 



Operating Expenses 353 

should let one salesman go and maintain his sales, the 
average sales per salesperson would be about $17,300 or 
average for the group. The elimination of the salary of 
one salesman would decrease expense by 1.8 per cent 
and increase profit by the same percentage. 

Smith's salesmen do not sell more than the average. 
It would seem, therefore, that their salaries should be 
reduced to the average or that the sales per man should 
be increased. Reducing salaries to the average level 
would decrease expense and increase profit by 1.8 per 
cent. These two changes would increase profit, or in- 
come, on investment from 3.7 to 10 per cent. Smith 
takes a salary of $2,400 compared with an average of 
$2,083. If he had taken only the average salary, his net 
income from the store would have been correspondingly 
increased. Thus, the principal trouble with Smith's busi- 
ness is the fact that he has too many employees or pays 
above-average salaries. 

Another solution for Smith would be to increase his 
volume of sales with his present payroll. He might 
secure a more alert and better trained sales force. It 
may be that his prices are too high ; this is suggested by 
his relatively high margin. As he is spending more 
than the average for advertising, it would seem that his 
trouble is in a poor selection of goods, high prices, poorly 
displayed goods, or poor salesmanship. He might try 
to improve his business by a better selection and display 
of goods and by improved salesmanship in his store. 

Chapter 20 
Review Questions 

1. What expenses does a merchant incur in operating his 
business? 



354 Operating Expenses 

2. Should a merchant include a salary for himself in 
expenses? 

3. When a merchant owns the building in which he con- 
ducts his business, should he include rent on this building 
as an expense? 

4. If a dealer includes rent on his own building as an 
expense, should the taxes, repairs, depreciation, and interest 
on the value of the building be included as expenses? 

5. Should a dealer include interest paid on money bor- 
rowed at the bank as an expense? 

6. Should a dealer include estimated interest on his capi- 
tal invested in the business as an expense? 

7. How may a dealer group or classify his expenses? 
Which is the most widely used classification? 

8. How are returned goods and allowances made to cus- 
tomers for defective goods shown on the operating statement? 

9. How do you find the cost of goods sold? 

10. How may cash discounts received on purchases be 
shown on the operating statement? 

11. How is net profit determined? 

12. What is the relation between expenses and the kind of 
goods handled? 

13. What is the relation of expenses to the services rendered 
customers? What is the retail grocer's estimated cost of 
selling goods on credit and delivering them to the customers? 

14. Why do the expenses of the merchants handling the 
same kind of goods, rendering the same services, operating 
in similar locations, and doing the same volume of business 
vary so widely? 

15. What is the relation of a merchant's operating effi- 
ciency to his expenses? 

16. How may a merchant measure his operating efficiency? 

17. A dealer's books show the following figures: net sales, 
$60,000; opening inventory (Jan. 1), $12,000; closing in- 



Operating Expenses 355 

ventory (Dec. 31), $18,000; purchases, $51,000; expenses, 
$12,000. Compute the percentages of margin; of expense; 
and of profit. 

18. A dealer has $50,000 worth of goods on hand on Janu- 
ary 1. During the year he purchases $200,000 worth of 
goods; makes sales of $300,000; pays his employees $30,000; 
pays himself $5,000; pays $12,000 for rent; pays $9,000 for 
advertising; and pays $18,000 for other expenses. At the end 
of the year he has $30,000 worth of goods on hand. Compute 
this dealer's percentages of margin; of expenses; and of profit. 

Thought Problems 

1. William Edwards conducts a retail grocery store. His 
books for the year show the following: opening inventory, 
$5,000; purchases, $50,000; freight and trucking in getting 
the goods to his store, $500; cash discounts taken on pur- 
chases, $600; sales, $63,000; closing inventory, $4,500; 
salaries of 4 salesmen, $4,800; rent, $600; advertising, $315; 
delivery, $630; losses on bad debts, $315; salary of part time 
office employee, $300; salary of proprietor, $3,000; interest 
paid on borrowed money, $250; interest on $10,000 owned 
capital, $600; other expenses, $1,990. 

(a) Set up an operating statement and compute the per- 
centages for the important items in the statement. 

(b) Compute the percentage earned on the proprietor's 
capital. Did Edwards make a profit or a loss during the year? 

2. John Powell conducts a retail hardware store in King- 
don, a town of 7,000 population. During the year he had 
the following items on his books: gross sales, $82,000; returns 
and allowances, $2,000; inventory on January 1, $28,000; in- 
ventory on December 31, $32,000; purchases, $64,000; salaries 
of 6 salesmen, $7,500; salary of proprietor, $2,600; other 
salaries, $1,600; rent, $2,200; advertising, $1,000; loss from 
bad debts, $800; delivery, $600; interest on borrowed money, 
$900; other expenses, $2,800; interest received on notes and 
accounts receivable, $400. Powell spent one half of his time 
in selling and the other half in buying goods and managing 
the store. The employees other than salesmen consist of an 



356 Operating Expenses 

office girl and a delivery boy. The total number of people 
engaged in operating the store is 9. Sixty per cent of the 
sales are made on credit, and it takes an average of 120 days 
to collect outstanding accounts. 

(a) Set up an operating statement. 

(b) Criticize the operation of this store (refer to Table 30). 

3. Newton's department store is located in a city of 100,- 
000. In a recent year the books of this store disclosed the 
following: gross sales, $720,000; returns and allowances, $20,- 
000; opening inventory, $180,000; closing inventory, $155,000; 
purchases, $440,000; discounts on purchases, $12,000; trans- 
portation charges on purchases, $7,000; salaries and wages, 
$120,000; rent, $35,000; advertising, $12,000; losses from bad 
debts, $3,000; other expenses, $42,000; interest on owned and 
borrowed capital at 6 per cent a year, $30,000. 

(a) Set up an operating statement, computing the per- 
centages. 

(b) Compute the percentage which this business earned on 
the investment (owned and borrowed). 

(c) Criticize the operation of this store (refer to Table 28). 



CHAPTER 21 
Some Tests for Merchandising Efficiency 

Tests for efficiency. In addition to a study of margin, 
expenses, and profit as shown in the preceding chapter, 
certain other comparisons are valuable. Such compari- 
sons may be called tests for merchandising efficiency. 
Four important tests are: (1) the volume of sales per 
person; (2) sales per square foot of space; (3) collection 
period (the length of time it takes to collect for goods 
sold on credit) ; and (4) the rate of stock turnover. 

Volume of sales per person. The salaries and wages 
of salespeople are the merchant's largest expense. They 
usually make up one-fourth to one-half of his expenses. 
His total expenses and profits depend very largely upon 
the efficiency with which he uses his own time and the 
time of his employees, and the volume of business done 
by each person is an important index to the efficiency 
of his store. 'This can be found by dividing his sales by 
the total number of people engaged in the operation of 
the business. 1 

As the volume of sales per person increases, the ex- 
pense percentage declines and profits increase. This is 
illustrated by the figures covering the operations of 
grocers and hardware stores shown in Table 31. 

1 For purposes of computing the average volume of sales per person, 
part-time employees should be reduced to a full time basis. Thus if 
the regular employees work 48 hours a week, persons working 16 hours 
a week would be considered as one-third of a full time employee. 

357 



358 Some Tests for Merchandising Efficiency 

TABLE 31. RELATION OF SALES PER PERSON TO LABOR 
COST AND PROFIT 

RETAIL GROCERS 

Average Sales per Expense for Salaries 

Person Employed and Wages (Percent- 

ages of Sales) 

Under $9,000 13.2 

$ 9,000-10,000 12.0 

11,000-12,900 12.0 

13,000-14,900 9.9 

15,000-16,900 9.6 

17,000 and over 8.4 

Average $12,200 10.9 

RETAIL HARDWARE STORES 
IN TOWNS OF 10,000 TO 50,000 POPULATION 
Sales per Person Percentage of 

Employed Earnings on 

Sales 

$ 8,309 1.2 loss 

10,160 2.8 loss 

12,027 8 profit 

13,239 1.3 profit 

15,927 2.4 profit 

Employees perform different services. The merchant 
uses labor for many purposes: to make sales; to make 
purchases; to deliver goods; to unpack, mark, and ar- 
range stock in the store; to arrange window displays; 
to keep records; and to make collections. The efficiency 
of each of these operations is important. All operations 
cannot, however, be judged by the same standard. The 
bookkeeper is to be judged by her speed and accuracy, 
the delivery boy by his speed and politeness, and the 
window display man by the attractiveness and timeliness 
of his displays. 

Sales per salesman. Most merchants have a record of 
the volume of sales made by each of their salespeople, as 
this information can be easily secured from the cash 
register or sales slips. The merchant thus has a definite 
measure of the performance of each salesman. 

Most salesmen in retail and wholesale stores are paid 



Some Tests for Merchandising Efficiency 359 

either straight salaries, or salaries plus bonuses or com- 
missions. The earnings of retail salesmen do not ordi- 
narily increase in proportion to the increase in their 
volume of sales. The volume of sales made by a sales- 
man depends upon his ability as a salesman; and upon 
factors beyond his control, such as the attractiveness of 
the merchandise, the prices of the goods, the advertising 
done by his employer, the reputation and location of the 
store, the prosperity of the community, and other fac- 
tors that bring customers into the store. Even when 
the salesmen are paid straight commissions, the mer- 
chant's expenses decline as the salesmen increase their 
volume of sales, because the percentage of overhead 
expense declines. 

As the sales volume of his salesmen increases, the mer- 
chant's expenses decrease and his profits increase. This 
is illustrated by the figures in Table 32. 

TABLE 32. RELATION OF VOLUME OF SALES PER SALES- 
MAN TO A MERCHANT'S EXPENSE AND PROFIT 
WHOLESALE DRUGGISTS 

Percentage of 

Sales per Salesman Sales Force 

Expense 

Under $ 80,000 4.5 

$80,000-119,000. . .3.7 
Over 119,000 2.8 

RETAIL CLOTHING STORES WITH SALES OF $40,000 TO $80,000 

Volume of Sales per Percentage of Percentage of 

Full-Time Salesman Selling Ex- Estimated 

pense* Profits] 

Under $12,000 6.0 4.5 

$12,000- 16,000 ... 6.3 7.6 

16,000- 20,000 4.6 8.9 

20,000- 24,000 4.6 10.3 

24,000- 32,000 4.3 9.4 

32,000 and over 3U. 12.3 

Averages $16,669 5.1 8.1 

* Figures are for 1919, a year when prices were high and percentage 
expenses low. 

t Estimates for a normal year. 



360 Some Tests for Merchandising Efficiency 

Average sales per person. Average sales for all 
persons employed in retail stores were $8,908 in 1929 and 
$5,613 in 1933. These figures include proprietors and 
all employees. Averages for various types of stores are 
shown in Table 33 for 1929. 

TABLE 33. AVERAGE SALES PER PERSON IN RETAIL 
STORES IN 1929* 

Type of Store Average Sales 

Grocery and meat $12,277 

Department stores, without food 8,339 

Dry goods 8,074 

Filling stations 8,610 

Automobile dealers 16,532 

Men's clothing and furnishings 12,231 

Shoes 10,454 

Furniture 10,342 

Restaurants 3,642 

Lumber and building materials 13,438 

Hardware 9,055 

Drug ' 7,964 

Tobacco 8,311 

* Census data. Part-time employees reduced to full time, on basis 
that they work one-fourth of full time. 

Irregular sales. One of the main difficulties in secur- 
ing a large sales volume per person is the bunching of 
purchases by the customers. In the sale of clothing and 
farm equipment, sales are largest in the spring and fall 
seasons and are relatively light in the winter and sum- 
mer. The jeweler gets his large sales volume during the 
Christmas season. The florist gets his big volume for 
special occasions, such as Easter, Decoration Day, Val- 
entine's Day, and Mother's Day. The grocer gets his 
big volume on Saturdays. Stores often find that busi- 
ness is much better on fair days than on stormy days. 

Sales are not evenly distributed throughout the dSy. 
Many stores do most of their business during a few rush 
hours. If a merchant has enough salesmen to handle 



Some Tests for Merchandising Efficiency 361 

business during the rush periods, some of them are usu- 
ally idle at other times. This idle time reduces their 
average sales volume. The merchant can attack this 
problem in two ways. First, he can study his sales and 
find his peaks and employ part-time salespeople to work 
during his busy periods. The grocer may employ high 
school students to work on Saturdays; and the depart- 
ment store may employ married women, who want part- 
time employment, to work during the rush hours and 
for special sales. Part-time employees afford a good 
solution if satisfactory salespeople can be found. The 
grocer may have little trouble in finding suitable people 
for part-time employment, whereas the furniture, jew- 
elry, and hardware stores may have great difficulty in 
finding competent salespeople who are available for part- 
time work. 

The second method is to try to even up the business 
by increasing sales during dull periods. This may be 
done by adding lines of goods that sell at different times. 
Thus the coal dealer sells ice in the summer; and the 
soda fountain, whose business is greatest in the summer, 
adds lunches which sell the year around. Many stores 
use special sales to attract customers in the morning 
hours and on dull days. The advertising may be con- 
centrated during the first half of the week, with the 
purpose of building up sales during the first five days 
in the week. 

Better salesmanship. Good salesmen sell more goods 
than poor salesmen. Two salespeople work in the same 
store and have the same opportunities, and yet one sells 
50 or 100 per cent more than the other. The good sales- 
man knows his goods, is polite and considerate of his cus- 
tomers, and tries to sell them the goods adapted to their 
needs. He uses suggestive selling bv telling his cus- 



362 Some Tests for Merchandising Efficiency 

tomers about new goods that have just been received 
or by employing the telephone to call his customers dur- 
ing dull periods and when new goods are received. In 
such ways the salesman increases his sales and builds a 
clientele of customers. The principles of salesmanship 
are explained in Chapters 27-30. 

Sales training. The merchant can improve the qual- 
ity of salesmanship by selecting his salesmen carefully 
and training them thoroughly. He should tell them all 
about the goods, show them how to handle customers, 
how to make out sales records, provide them with in- 
formation about the merchandise, and encourage them 
to read trade papers. 

Pay. Perhaps the biggest task in improving retail 
salesmanship is to overcome human inertia and laziness 
and keep the salesmen constantly awake and interested 
in their work. The method of paying salespeople has a 
good deal to do with keeping them alert and active. Too 
often salespeople are paid straight salaries. More use 
should be made of bonuses, commissions, and prizes. 
Salesmen may be rewarded for all of their sales over a 
fixed amount or quota, for securing new customers, for 
increasing sales over past periods, and so forth. 

Size of sales. Small individual sales limit the volume 
of sales which a salesman makes. A salesman can sell 
two cans as quickly as one, and it takes little more time 
to sell a case than a package. The salesman may even 
be able to sell a carton, case, bushel, or bag more quickly 
than a few pounds, as he does not have to weigh or 
measure the larger unit. Some stores try to induce their 
customers to buy in larger quantities by making com- 
bination offers, by suggesting larger purchases, and by 
making lower prices on larger purchases. An article 
priced at 10 cents per item or $1 a dozen often produces 



Some Tests for Merchandising Efficiency 303 

many sales by the dozen. A price card reading "5 for 
25 cents" may produce more sales than a sign reading 
"5 cents." 

Store arrangement. The store can be arranged to 
speed up sales. The goods should be placed so that the 
customers and salespeople can see and get at them easily. 
The scales, measuring devices, telephones, and cash reg- 
isters should be located where the salesmen can reach 
them without extra steps. 

"Goods well displayed are half sold" is an old motto. 
Modern stores put many of their goods on counters and 
tables where the customers can see and examine them. 
This method of display reduces the amount of the sales- 
man's time required to make sales. Some stores have 
adopted the "self-service" method and allow the cus- 
tomers to select their own goods without the help of 
salesmen. 

Rent. Rent usually equals from 1 to 4 per cent of 
sales in different types of stores, and makes up some 
7 to 15 per cent of a merchant's total expenses. If heat, 
light, and the other expenses connected with the oc- 
cupancy of a building are included, rent is even more 
important. The dealer with too much space tends to 
allow stock to accumulate and become dirty or to re- 
main so long on his hands that it goes out of fashion. 
Too little space, on the other hand, cramps a merchant 
in properly displaying his goods and limits the expansion 
of his business. 

By comparing his operating statement with that of 
other similar stores, the dealer can learn whether his 
rent is above or below the average. If his percentage 
cost of rent is too high, he must find the cause before 
he can remedy the situation. Does he have too much 
space? Is the location too expensive for his purposes? 



364 Some Tests for Merchandising Efficiency 

Location. Location is very important for a retail 
store. Different types of stores need different kinds of 
locations. A good location for one type of store may be 
very poor for another type. Stores handling shopping 
goods should be in shopping centers, while stores han- 
dling convenience goods should be located where they 
can be easily reached by the consumers. It may be de- 
sirable to secure locations in residential districts, in rural 
villages ; at crossroads, on the corners of busy streets, 
near suburban stations, and on automobile highways. 
The merchant should study the matter carefully before 
locating his store or changing his location. 

Sales per square foot. A comparison of sales per 
square foot of floor space will help the merchant to de- 
termine whether a high rent expense is caused by too 
much space or by paying too much for the space. If 
his percentage cost of rent is high and his volume of 
sales per square foot is low, he has too much space. He 
should use less space or increase his volume of sales. If, 
on the other hand, his rent cost is high and his volume 
of sales per square foot is high, he is paying too much 
rent. Either the landlord is overcharging him or he is 
using a location that is too expensive for the kind of 
goods sold. A study of sales per square foot is valuable. 
As yet there is, unfortunately, relatively little data avail- 
able for comparative purposes. 

The Harvard Bureau of Business Research has made 
available figures for department stores, which appear in 
Table 34. The rent paid per square foot tends to increase 
faster than the sales made per foot. This is the one 
reason why the percentage cost of rent increases as we 
pass from the poorer to the better locations and from 
the smaller to the larger towns. 

Both sales and rent per square foot increase as the 



Some Tests for Merchandising Efficiency 365 

TABLE 34. SALES AND RENT PER SQUARE FOOT IN 
DEPARTMENT STORES* 

SALES PER SQUARE FOOT RENT PER SQUARE FOOT 
Sales Volume Selling Total Selling Total 

of Stores Space Space Space Space 

Under $1,000,000 ... $20.50 $15.50 $0.55 $0.40 

$1,000,000-2,000,000... 30.50 22.00 0.85 0.60 

2,000,000-4,000,000... 30.50 21.50 1.00 0.75 

4,000,000-10,000,000... 40.00 24.80 1.50 0.90 

10,000,000 and over. . . . 52.50 28.00 1.90 1.00 

*Figures for 1927. 

size of the store increases. Rent, however, increases 
faster than sales. The rent per square foot on the total 
space occupied increased from 40 cents to $1, or 150 
per cent, while the sales increased from $15.50 to $28.00, 
or 80 per cent. This tendency is even more marked 
when the space used for selling is considered. The rent 
per foot on selling space increased 245 per cent, while 
the sales made on each foot increased only 156 per cent. 
It will also be noted that the small stores used a larger 
proportion of their space for selling than the larger 
stores. The stores with sales under $1,000,000 used 73 
per cent of their floor space for selling, while stores with 
sales over $10,000,000 used only 53 per cent of their space 
for selling. The other 47 per cent was used for stock- 
rooms, offices, and other purposes. This indicates that 
the larger stores perform more wholesale functions. 

Customer frontage. Many stores display their goods 
on tables and counters where the customers may see and 
examine them. This is done to increase sales. The 
length of tables and counters on which goods are dis- 
played is called customer frontage. The store layout, 
or the way the fixtures are arranged, determines the 
amount of customer frontage, and the same amount of 
space may be so arranged as to give much or little front- 



366 Some Tests for Merchandising Efficiency 

age. A merchant may compute his sales per foot of cus- 
tomer frontage. 

Uses of capital. The merchant uses capital princi- 
pally for three purposes: to carry stocks of goods; to 
extend credit to customers; and to pay current operating 
expenses, such as salaries, rent, and advertising. Capital 
used to carry stocks of goods is discussed in the next 
chapter. 

Collection period. The merchant who sells on credit 
does so to increase his sales, or to secure higher prices 
for his goods. Credit is a definite service to many cus- 
tomers. Credit sales, however, add to the merchant's 
expense. They tie up capital in accounts receivable and 
involve expanse in keeping records and making collec- 
tion. The longer accounts are outstanding, the greater 
the expense of collecting them and the larger the num- 
ber that prove uncollectible and that must be charged 
off as bad debts. It is thus important that a merchant 
collect his accounts as quickly as possible without offend- 
ing his customers. The promptness with which he makes 
collections is an important test of his efficiency. 

Let us consider the case of two dealers, A and B, each 
of whom sells $100,000 during the year. A sells $36,000 
on credit, while B sells $72,000 on credit. A has monthly 
credit sales of $3,000, while B has monthly credit sales 
of $6,000. A collects his accounts in 45 days, while it 
takes B 90 days to collect his accounts. As it takes A 
45 days (one and a half months) to make collections, he 
has $4,500 tied up in accounts receivable, while B has 
$18,000 in accounts receivable on his books. On the 
basis of interest at 6 per cent, it costs A $270 and B 
$1,080 to carry these accounts; A has therefore saved 
$810 a year over B in interest cost. This saving is 
equivalent to 0.8 per cent of sales. In actual practice, 



Some Tests for Merchandising Efficiency 367 

the money may be worth more than 6 per cent if used 
to take cash discounts on purchases, it may be worth 
from 12 to 36 per cent. 

Interest is only a part of the cost of extending credit. 
In addition, there is the expense of keeping records of 
credit sales, of making collections, and of bad debt losses. 

Collection percentages. Monthly collection percent- 
ages are computed by dividing the collections made dur- 
ing the month by the accounts and notes receivable on 
the books at the beginning of the month. Thus if a 
dealer has $5,000 in accounts receivable on his books at 
the beginning of the month and collects $2,000 during 
the month, his collection percentage is 40. A survey 
covering nearly 6,000 manufacturers and wholesalers 
with annual sales of 9 billion dollars showed that 90 per 
cent of their sales were made on credit, and that the 
average collection percentage was 48 in normal times. 
This indicates that it took from 60 to 64 days from the 
end of the month in which the sales were made to make 
their collections. 

Retailers make a smaller percentage of their sales on 
credit. In 1929, 21 per cent of their sales were made on 
open account credit, 13 per cent on installment credit, 
and 66 per cent for cash. Open accounts (ordinary 
charge accounts) are collected much more quickly than 
installment accounts. 2 During the depression a smaller 
proportion of retail sales were made on credit. This 
may have been due to a decline in the proportion of 
large durable articles sold, to a greater reluctance of 
people to go into debt, or to increased strictness on the 
part of retailers in granting credit. In 1933, approxi- 

2 At the end of the year, retail credit outstanding amounted to 5^4 
billion dollars 2% billion dollars of open accounts and 3 billion dollars 
af installment accounts. 



368 Some Tests for Merchandising Efficiency 

mately 27 per cent of retail sales were made on credit. 
In 1929, collection percentages on open accounts averaged 
about 42 per cent. During the depression collections 
were somewhat slower. Average percentages are shown 
in Table 35. 

Bad debts. Merchants selling on credit usually find 
some accounts uncollectible and must charge them off 
as bad debt losses. The percentage of loss from bad 
debts depends upon the class of people to whom credit 
is extended, the care used in selecting those to whom 
credit is extended, and the aggressiveness with which 
collections are made. The merchant who extends credit 
to poor risks must use aggressive methods in making col- 
lections in order to limit his losses. Bad debt losses may 
be stated as percentages of total sales or as percentages 
of credit sales. The latter is the more accurate method. 
Consider a merchant who has sales of $100,000, $40,000 
of which are made on credit, and who has bad debt losses 
of $200. His percentage of bad debt loss is 0.2 when 
computed on his total sales, and 0.5 when computed on 
credit sales. Figures showing bad debt losses for a large 
group of retailers are shown in Table 35. 

TABLE 35. RETAIL BAD DEBT LOSSES AND COLLECTION 
PERCENTAGES, 1929-1934* 



1930 1931 1932 1933 1934 

Bad debt loss on open account sales 0.5 0.6 0.9 1.4 1.2 l.C 

Bad debt loss on installment sales .. 2.3 2.8 4.1 6.7 4.1 l. 
Collection percentage on open ac- 

counts ....................... 42.7 41.3 38.9 36.2 36.7 41.9 

Collection percentage on installment 

accounts ................... 15.2 14.7 14.5 13.6 13.2 14.5 

*Based on survey made by U. S. Dept. of Commerce. 

Choosing the best credit policy. Extending credit and 
making collections add to the seller's expense, yet they 
may also increase his sales and profits. Some sellers 



Some Tests for Merchandising Efficiency 369 

charge high prices and extend liberal credit; losses and 
collection expenses may be high, and yet the higher 
prices and increased sales may make such a policy prof- 
itable. Other sellers find it profitable to sell at lower 
prices and sell only for cash, or to limit credit to good 
risks or extend credit only for short periods. The type 
of goods handled, the policies of his competitors, the 
customs in his trade or community, the kind of people 
he has for customers, and economic conditions should be 
considered in selecting the proper policy. 

Chapter 21 
Review Questions 

1. What is meant by "Tests for Merchandising Ef- 
ficiency"? 

2. Name four such tests. 

3. What is meant by the volume of sales per person? Per 
salesperson? 

4. What is the relation between the volume of sales per 
salesperson and the merchant's expenses and profits? Why 
this relationship? 

5. How can a merchant know the volume of sales made 
by each of his salespeople? 

6. What factors limit the average volume of sales made by 
salespeople in retail stores? 

7. How can a merchant increase the average volume of 
sales made by his salespeople? 

8. What is the relation of sales training to the average 
volume of sales? 

9. What is the relation between pay of salespeople and 
their volume of sales? 

10. How should a merchant pay his salespeople to secure 
a high sales volume per person? 



370 Some Tests for Merchandising Efficiency 

11. What is the relation between the arrangement of goods 
in a store and the volume of sales per salesperson? 

12. How does a dealer's expense for rent compare with his 
expense for the salaries and wages of salespeople? 

13. What is the danger of having too much space? 

14. How can a dealer find out whether his cost of rent is 
too high? 

15. If a dealer finds that his percentage cost of rent is too 
high, how can he find the cause and the remedy? 

16. What is the relation of the location of a store to its 
rent cost? 

17. Why should a merchant compute his volume of sales 
per square foot of floor space? 

18. What are the merchant's uses of capital? 

19. Why does a merchant sell goods on credit? 

20. What is the relation between the prompt collection of 
accounts receivable and a merchant's expenses? 

21. Why is the prompt collection of accounts desirable? 

22. What is meant by bad debts? 

23. How are monthly collection percentages computed? 

24. How do depressions affect bad debt losses and collec- 
tion percentages? 

Problems 

1. Underwood and Black conduct a retail service grocery 
store in a residential neighborhood of a town of 500,000 popu- 
lation. During the year they have sales of $60,000 and the 
following expenses: salaries for the two partners, $4,000; 
salaries of 4 salesmen, $4,800; salary of bookkeeper and tele- 
phone salesgirl, $900; salaries of two deliverymen, $1500; rent, 
$600; bad debt losses, $700; other expenses, $1,000; margin, 
$14,000. 

(a) Compute the percentages of labor cost, rent cost, bad 
debt loss, total expenses, and profit. 



Some Tests for Merchandising Efficiency 371 

(b) Criticize the conduct of the business. 

2. Leonard and Blake conduct a retail hardware store in 
a city of 10,000 population. Their operating statement for 
the year shows the following: sales, $80,000; salaries of the 
two owners, $6,000; salaries of 6 salesmen, $6,000; salaries of 
office employee, $1,500; salary of delivery and stockman, 
$1,000; rent, $3,000; loss from bad debts, $200; other expenses, 
$5,000. 

Compute the necessary expenses and criticize the operation 
of the store. 

3. The Empire is a department store located in a city of 
500,000 people. It occupies a four story and basement build- 
ing, 80 x 200 feet. The first two stories and the basement are 
used for selling, and the two upper stories are used for stock- 
rooms and offices. During the year, sales amount to $900,- 
000. The Empire's operating statement prepared at the end 
of the year shows the following figures: inventory, January 1, 
$260,000; purchases, $460,000; inventory, December 31, $220,- 
000; salaries and wages, $150,000; rent, $45,000; loss from bad 
debts, $4,000; advertising, $25,000; interest on capital invest- 
ment, $24,000; other expenses, $35,000; accounts receivable, 
$150,000. Two-thirds of the sales are made on credit. The 
store has 80 employees, 50 of whom are engaged in selling. 

Criticize the operation of this store. 

Thought Problems 

1. Why does the average volume of sales per person vary 
so widely in different types of stores? In different stores sell- 
ing the same kind of merchandise? 

2. What is the relation between the amount of space oc- 
cupied and the way merchandise is displayed and the rate of 
stock turnover? 

3. Why are most retail salespeople paid straight salaries 
or salaries plus bonuses on all sales over fixed quotas, rather 
than on a commission basis? 

4. What kind of locations do the following retailers need: 
Grocery store? drug store? news stand? cigar store? millinery 



372 Some Tests for Merchandising Efficiency 

store? men's clothing store? women's clothing store? coal 
yard? farm implement store? women's high-grade shoe store? 
jewelry store? hardware store? 

5. When should an account be charged off as bad (uncol- 
lectible) ? 

6. It is said that a firm collection policy builds sales ; that 
a person tends to buy from the store where he knows his ac- 
count is paid and his credit is good ; and that he tends to avoid 
the store where he knows his account is long past due. Is 
this true? Comment on the statement. 

7. How can a merchant collect his accounts promptly 
without antagonizing his customers? 

8. Should a dealer compute his bad debt loss percentage 
on his total sales or on his credit sales? 

9. Is the number of dollars of sales per square foot of floor 
space a better index of the dealer's efficiency than the per- 
centage cost of rent? Why or why not? 

10. Why do retail grocers collect their accounts more 
quickly than retail clothing stores? Why are not groceries 
sold on the installment plan? 



CHAPTER 22 

Stock Turnover 

Meaning of stock turnover. Stock turnover measures 
the frequency with which goods are bought and sold. 
It is the relation of sales to the quantity of goods car- 
ried in stock by the merchant. Goods are bought, 
placed in stock, and sold. When the quantity sold equals 
the average quantity carried in stock, the merchant is 
said to have turned his stock one time. Stock turnover 
is usually stated as a certain number of times per 
year. 

How stock turnover is computed. The rate of stock 
turnover is computed by dividing the cost of goods sold 
by the average inventory (quantity of goods on hand) 
at cost. Thus if the cost of goods sold during a year is 
$20,000, and the average stock is $5,000 at cost, the 
merchant has turned his stock 4 times. Many dealers 
take inventory only once a year. When this situation 
exists, the average inventory figure is obtained by adding 
the inventory at the first of the year and the inventory 
at the close of the year and dividing by two. It is, of 
course, desirable to take stock monthly or quarterly, or 
to keep a continuous or perpetual inventory. The latter 
is known as "unit control" of stock. 

Advantages of a rapid rate of stock turnover. A 
rapid rate of stock turnover reduces the dealer's ex- 
penses, reduces the number of mark-downs, gives the 
consumer fresher goods, and often lower prices. It usu- 
ally increases the dealer's profits. 

373 



374 Stock Turnover 

Reduced expenses. A rapid rate of - stock turnover 
reduces the quantity of goods carried in stock in rela- 
tion to sales; the reduced quantity, in turn, requires a 
smaller amount of capital and so reduces interest charges. 
Taxes and insurance on goods in stock are likewise low- 
ered. A smaller stock reduces the amount of space 
needed by a merchant in which to conduct his business, 
which cuts down his expenses for rent, heat, and light. 

A rapid rate of turnover also reduces a merchant's 
selling expenses. The dealer with a rapid rate of stock 
turnover has lower expenses and may therefore place 
lower prices on his goods. Low prices and fresh goods 
increase his sales. He usually has his stock well ar- 
ranged, thereby enabling the salespeople to get the goods 
quickly. Because of fresher goods, lower prices, and bet- 
ter arranged stocks, his salesmen usually have larger 
volumes of sales than salesmen in stores which turn their 
goods slowly. 

Reduced mark-downs. The faster goods are sold, the 
less opportunity they have for going out of fashion or 
becoming soiled, stale, or shelfworn. Thus mark-downs 
are reduced. A rapid rate of turnover gets new fashions 
to the consumers more quickly and allows foodstuffs 
less time to wilt and decay. 

Reduced margins. The merchant with a rapid stock 
turnover often sells at lower prices than other merchants. 
He places low prices on his goods in the hope of increas- 
ing sales and his rate of stock turnover, and he hopes 
that the rapid rate of turnover will reduce his expenses 
and increase his profits. In order to speed up his turn- 
over, the merchant often buys in smaller quantities. It 
is possible that this causes him to pay higher prices for 
his goods by the loss of quantity discounts or that his 
transportation costs are increased by the smaller ship- 



Stock Turnover 375 

ments. Whatever the reason, studies of the subject 
show that dealers with high rates of turnover have some- 
what lower margins than dealers with slow rates of turn- 
over. 

Increased profits. A rapid rate of stock turnover 
reduces both the merchant's margin and his expenses; 
but, as a rule, expense is reduced more than margin, so 
that profit is increased. Studies of operating statements 
show that increasing the rate of stock turnover is one of 
the surest ways of increasing profits. 

Illustrative figures. The effects of the rate of stock 
turnover on the margin, expenses, and profits of a group 
of department stores are shown by the figures in 
Table 36. 

TABLE 36. RELATION OF RATE OF STOCK TURNOVER TO 

MARGIN, EXPENSES, AND PROFITS OF 

DEPARTMENT STORES* 

Average of 
All Stores 

Rate of stock turnover: Under 2 2-2.9 3 and Over 24 

(Percentage of Sales) 

Margin 29.9 29.4 28.3 29.3 

Salaries and wages 17.0 16.2 14.6 16.1 

Rent 4.2 3.7 3.8 3.9 

Interest 3.5 2.4 2.1 2.9 

Other expenses 7.6 7.5 7.0 7.4 



Total expenses (including 

interest) 32.3 29.8 27.2 30.0 

Profit or loss (over interest) 2.4 loss .4 loss 1.1 profit 0.7 loss 

*226 department stores with sales under $500,000 for 1929. 

It will be seen from the figures in this table that the 
margin decreased from 29.9 per cent for stores turning 
their stock less than twice a year to 28.3 per cent for 
stores turning their stock three or more times per year. 
Total expenses, including interest; declined from 32.3 
per cent to 27.2 per cent. This decline was equal to 5.1 



376 Stock Turnover 

per cent of sales. As the expenses declined much faster 
than the margin, those stores turning their stocks rap- 
idly had larger profits than the stores turning their 
stocks slowly. The stores with less than three turns a 
year showed a loss after paying interest; this meant that 
they failed to earn a fair rate of interest on their invest- 
ment. Only those stores turning their stocks three or 
more times a year earned profits larger than the interest 
on their capital. 

How to increase rate of turnover. The dealer can in- 
crease his rate of stock turnover by decreasing the 
amount of goods carried in stock, by increasing his sales 
and carrying the same or less stock, or by both increas- 
ing sales and decreasing stock. 

Decreasing stock. The merchant can decrease his 
stock in two ways. He can continue to carry the same 
number of articles in stock but carry a smaller quantity 
of each article, or he can decrease the number of articles 
carried. 

Small-order buying. In order to reduce the total 
value of the stock and yet carry as many different items 
as ever, it is necessary to buy in smaller lots and buy 
more frequently. This is called small-order, hand-to- 
mouth, or current-need buying. Suppose that a dealer 
has daily sales of 24 cakes of a certain brand of soap 
which he has been buying 10 cases at a time. Each case 
contains 144 cakes. Each purchase lasts for 60 days. 
In order to increase his rate of turnover, he may buy 
one case at a time and place an order every six days. 
To keep from running out of stock, the new order may 
be placed for delivery when the new case is one-half 
gone. The dealer thus carries a three days' reserve and 
can continue to supply his customers if delivery is de- 
layed for three days. 



Stock Turnover 377 

This method of buying enables the dealer to reduce 
the size of his stock without losing sales. A good system 
of stockkeeping and ordering, howfever, is necessary to 
the success of this system. These are discussed in the 
next chapter. 

The merchant often hesitates to buy in small quanti- 
ties if this involves higher prices by losing quantity dis- 
counts. It is often profitable to buy in large quantities 
to secure the lower prices. However, after careful study 
many dealers have come to the conclusion that a rapid 
rate of turnover is preferable to ordinary quantity dis- 
counts. 

Since style merchandise goes out of fashion quickly, 
large purchases often mean that some of the goods must 
be closed out at drastic price reductions, and such re- 
ductions may easily outweigh the quantity discounts. 
Perishable goods, such as fresh fruits, vegetables, flow- 
ers, and meats, spoil quickly. The merchant who 
overbuys suffers either from spoilage or from price re- 
ductions made to sell the goods before they become 
unsaleable. 

On the other hand, staple, non-perishable goods, such 
as canned foods, nails, overalls, and soaps, can be car- 
ried in stock for considerable periods with little risk of 
fashion changes or spoilage. The merchant can buy 
such goods in large lots when quantity discounts are of- 
fered. He should, however, weigh the price advantage 
against the expenses incurred in carrying the goods un- 
til sold rent, interest, taxes, insurance, handling costs, 
and the losses from theft. 

Let us consider the case of a merchant who sells 1,200 
cases of canned corn per year, or 100 cases per month. 
Let us assume that this corn can be bought from the 
canner on September 1 for cash at $2 per case, while if 



378 Stock Turnover 

it is bought from the wholesaler as needed throughout 
the year, the price will be $2.30 per case, or a total of 
$2,760. If the dealer buys the corn on September 1, 
he will need only $2,400. The saving in price is $360. 
The $2,400 will be invested for an average of 6 months, 
if the corn is sold evenly throughout the year; therefore 
if he can borrow money at 6 per cent, the cost of the 
interest will be $72. Clearly, if interest is the only 
expense, the merchant should buy the year's supply. 

Other expenses, however, are involved. The ware- 
house space necessary to store the goods, the cost of 
placing them in the warehouse and taking them out, and 
the insurance on the goods must be considered. The 
dealer must also assume the risk that the price of the 
corn will drop before he sells all of it and that he will 
have to take a loss on the amount in stock when the price 
drops. The merchant may be able to use his money 
more profitably in other ways, for example, in taking 
cash discounts. After all these factors are considered 
the dealer may conclude that it is wise to buy the corn 
in small lots from the wholesaler. 

Small-order buying, if properly used, can speed up 
turnover and reduce expenses. It is possible to carry as 
complete stocks as when goods are bought in larger quan- 
tities, and sales may actually be increased by having 
fresh goods in stock at all times. If, however, small- 
order buying is overdone or poorly executed, the dealer 
may have incomplete stocks and may lose sales. A good 
stockkeeping system is needed to enable the system to 
be used successfully. 

Carrying fewer articles. Another method of reducing 
the amount of stock carried is to stop handling the slow- 
selling articles. When a merchant studies his sales, he 
usually finds that he has in stock many items for which 



Stock Turnover 379 

he has very little demand. A grocer may handle 12 
brands of coffee and find that 85 per cent of his sales are 
made from three brands. One drug store formerly car- 
ried 50 brands of talcum powder and 75 brands of soap. 
It dropped 30 brands of talcum powder and 50 brands 
of soap and reported little or no loss in sales. A large 
drug store in New York City formerly had sales of $700,- 
000 and carried some 20,000 items in stock with an av- 
erage inventory value of $70,000. The number of items 
was reduced to 13,000. This reduced the investment in 
inventory to $50,000, and the smaller inventory increased 
its sales to $1,000,000. 

Many successful merchants have stopped carrying the 
slow-selling articles have "cut out the shelf warmers." 
They have studied their sales records and have stopped 
handling the articles, brands, colors, and sizes that have 
little demand. They give their attention to the popu- 
lar, fast-selling items. This has been done by many 
chain stores. These merchants say that it is poor busi- 
ness to carry items that sell so slowly that they are un- 
profitable that it is better to lose a sale now and then 
than to lose money on a lot of slow-selling merchandise. 
They say: "Let the customer seeking the unusual article 
go elsewhere, or order the desired article for her/' 

Another method of reducing the number of articles 
carried in stock is to reduce the number of price lines. 
Some dealers carry articles in stock at so many differ- 
ent prices that the customers are confused, and they 
often find that sales increase when they put all of their 
goods into a few price lines. Some stores carry such 
goods as dresses, suits, and shoes, at only one, two, three, 
or four different prices. 

Danger in reducing the number of articles carried. 
Reducing the number of articles carried in stock is dan- 



380 Stock Turnover 

gerous if done by guess or if carried to the extreme. The 
dealer reduces the number of brands carried and finds 
that he can usually substitute one of the brands in stock 
when a discontinued brand is requested. He, however, 
has no way of knowing how many of his customers go 
to other stores when they next want to purchase the 
discontinued brand. Suppose a store that carried 12 
brands of coffee discontinues the 8 slow-selling brands. 
Most of the customers who have previously bought the 
discontinued brands of coffee buy one of the four popu- 
lar brands and are satisfied. Some, however, feel that 
their favorite brand has a superior flavor and may not 
like the substitute brand. When they next want coffee, 
they go to a store that has their favorite brand, and 
while they are in this store, they are very likely to buy 
many other articles besides coffee. Carrying a full line 
of goods is a good way of attracting customers. 

In the case of shopping goods, large stocks are es- 
pecially desirable, as shoppers like to make their selec- 
tions from large assortments. A woman wants a dress. 
One store has only a few dresses of her size, none of 
which seems to suit her. She goes to another store that 
has a large number of dresses in her size. She may buy 
a dress just like one that she saw at the first store, yet 
the first store lost the sale. Merchants selling shopping 
goods should carry stocks large enough to make good 
displays and create favorable impressions on their cus- 
tomers. 

The number of items carried in stock may be prof- 
itably reduced under some conditions. A store must, 
however, use common sense in discontinuing slow-selling 
articles. In the case of articles that are more or less 
staple, as coffee, talcum powder, and soap, the demand 
for particular brands may depend largely upon the 



Stock Turnover 381 

whims of the consumers. For example, when customers 
are induced to try different brands, they may find they 
like them as well as the brands formerly used; or, again, 
it may make little difference to the consumers whether 
they buy products in 10 or 12 ounce containers, one of 
which sizes may be eliminated. 

The number of articles carried may be reduced when 
the dealer has spread his capital over too many lines. 
The garage adds the agency for a radio, the grocery store 
adds automobile tires, and the drug store carries electri- 
cal merchandise. In such cases the dealer is not usually 
equipped either to sell or to service the goods. He does 
not carry enough stock to attract customers, and his 
salesmen do not know enough about the goods to talk 
about them intelligently. Many stores have added new 
lines until their stores are literally "junk shops." There 
are thousands of dealers who should reduce the number 
of lines of goods which they are trying to sell. 

The dealer should discontinue those articles for which 
there is little or no demand among his customers. An 
example was a city drug store which had veterinary cap- 
sules on its shelves. 

The dealer may purposely eliminate the slower-selling 
items with a full knowledge that he cannot satisfy every- 
body. He expects to secure a rapid rate of stock turn- 
over and reduce his expenses and selling prices. He 
makes a bid for business on the basis of low prices. He 
attracts customers by his prices, sells them the fast- 
moving goods, and lets them go elsewhere for the slower- 
moving articles. This policy is best adapted to stores 
located in busy shopping sections. 

Advantages of full stocks. The store with complete 
stocks attracts customers who want articles not carried 
by other stores, and it has an opportunity of securing 



382 Stock Turnover 

them as regular customers for all of its goods. It se- 
cures a reputation for having a complete stock. Be- 
cause the automobile has made trade mobile, people who 
do not find what they want at one store can easily visit 
other stores. 

Many of the grocery chains led in reducing the number 
of articles handled and bidding for business with low 
prices on the fast-moving staple articles. Some of them, 
however, have definitely reversed their policy and in- 
creased the number of articles carried in stock. 

Increasing sales. The merchant can increase his rate 
of stock turnover by increasing sales and yet carrying 
the same quantity of goods in stock. He may increase 
his sales by securing better trained salespeople, by do- 
ing more and better advertising, by better window dis- 
plays, and by improving the arrangement and display 
of goods in his store. These methods may be used re- 
gardless of stock turnover. However, the two methods 
of increasing sales that are most directly connected with 
stock turnover are to have lower prices and to secure 
fresher goods. 

Lower prices. Some dealers lower their prices in order 
to increase their sales and thereby increase their rate of 
stock turnover, and the higher rate of turnover is counted 
upon to reduce expenses and increase profits. Even 
if the percentage of profit is not increased, the number 
of dollars of profit may be larger. This method of in- 
creasing profit has been, and is being, used successfully; 
however, many dealers have attempted it unsuccessfully. 
If the lower prices do not increase sales, if increased sales 
do not increase turnover, if increased turnover does not 
reduce expenses more than gross margin is reduced by 
the lower prices if the attempt fails in any of these 
respects, the policy will be unsuccessful. 



Stock Turnover 383 

TABLE 37. TYPICAL RATES OF STOCK TURNOVER* 

RETAILERS 
Type of Store Times per Year 

Groceries 10.0 to 15.0 

Jewelry 0.8 to 1.0 

Shoes ... 2.0 to 2.5 

Hardware 2.0 to 2.5 

Men's clothing . 2.0 to 3.0 

Tires and automobile accessories 3.5 to 5.0 

Building materials . 3.0 to 4.0 

Stationers . 2.7 

Large department stores . 3.0 to 4.0 

Small department stores 2.0 to 3.0 

Drug . 2.0 to 3.0 

WHOLESALERS 

Type of Store Times per Year 

Grocers (service) . 5.0 to 8.0 

Drugs . 4.0 to 5.0 

Automotive equipment . ... 3.0 to 4.0 

Hardware . 3.0 to 3.5 

Plumbers . .4.0 

Dry goods . 3.5 to 5.0 

Shoe ... 4.0 to 6.0 

*Figures are from the Harvard Bureau of Business Research and 
from estimates from Census figures. 

TABLE 38. EFFECT OF RATE OF TURNOVER ON MARGIN, 
EXPENSE, AND PROFIT 

PERCENTAGE OF SALES 

Rate of Stock Margin Expense Profit over 

Turnover Including Interest 

Interest 

Retail grocery stores: 

Under 7 19.1 19.0 0.9 

7.0-11.9 19.0 17.0 2.0 

12 and over 18.8 16.7 2.1 

Retail jewelry stores: 

Under 0.8 42.3 42.5 0.2 Loss 

0.8-1.1 40.5 39.1 1.4 

1.2 and over 39.4 35.9 3.5 

Wholesale drug stores: 

Under 3.5 17.4 16.9 0.5 

3.0-4.4 17.5 15.5 2.0 

4.5 and over 16.4 . 14.9 1.5 

Wholesale plumbing stores: 

Under 3 21.4 23.7 2.S Loss 

3.0-5.0 20.4 21.7 1.8 Loss 

Over 5 19.0 17.8 1.5 



384 Stock Turnover 

Typical rates of turnover. Typical rates of stock 
turnover for various types of dealers are shown in Table 
37 (page 383). 

Turnover increases profit. The figures in Table 38 
(page 383) show how a high rate of stock turnover de- 
creases expenses and increases profits for groups of stores. 

Chapter 22 
Review Questions 

1. What is meant by stock turnover? 

2. How is the rate of stock turnover computed? 

3. What are the advantages of a rapid rate of stock turn- 
over? 

4. How does a rapid rate of stock turnover decrease ex- 
penses? 

5. Name seven expenses that are reduced by increasing 
the rate of stock turnover. 

6. What is the relation of the rate of stock turnover to 
selling expenses? 

7. What is the relation of the rate of stock turn to mark- 
downs? 

8. What is the relation between the rate of stock turn 
and margin? 

9. What is the relation between the rate of stock turn 
and profit? 

10. How does the rate of stock turn affect the margin, ex- 
pense, and profit of department stores? 

11. How can a dealer increase his rate of stock turn? 

12. What is meant by small-order buying? What are other 
names for the practice? 

13. What are the advantages of small-order buying? 

14. What are the disadvantages of small-order buying? 



Stock Turnover 385 

15. Under what conditions should a merchant reduce the 
number of articles carried in stock? 

16. What are the dangers in reducing the number of items 
stocked? 

17. What is the common sense way of reducing the number 
of items carried? 

18. What are the advantages of carrying complete stocks? 
What is its psychological or goodwill value? 

19. How may a dealer increase his sales? 

20. How may lower prices be used to increase stock turn- 
over? Is this method always successful in increasing profits? 
Why or why not? 

21. What is the relation between the rate of stock turnover 
and the freshness of a dealer's stock? 

22. John Smith, retail grocer, during the year has sales of 
$40,000; purchases of $28,000; opening inventory at cost of 
$8,000; and closing inventory at cost of $6,000. Compute the 
rate of stock turnover. Is this a satisfactory rate? 

23. William Oliver conducts a retail tire and automobile 
accessory store. During the year his sales amount to $80,000. 
He buys $70,000 worth of goods during the year. He has an 
inventory worth $30,000 at cost on January 1, worth $50,000 
on July 1, and worth $40,000 on December 31. Compute 
Oliver's rate of stock turn. Is he turning his stock as fast as 
he should? 

24. The Wholsum Company operates a wholesale drug 
business. During the year its sales amount to $10,000,000. 
It purchases $8,500,000 worth of merchandise during the year. 
Its five quarterly inventories are as follows: Jan. 1, $1,200,- 
000; Apr. 1, $1,600,000; July 1, $1,500,000; October 1, $1,- 
300,000; Dec. 1, $1,190,000. Compute the rate of stock turn- 
over. Is this a satisfactory rate? 

Thought Problems 

1. Why do so many dealers "take stock" (an inventory) 
only once a year? Is this a good practice? Why or why not? 



386 Stock Turnover 

2. Should inventories be taken when the inventory is high 
or when it is low? 

3. How should a merchant determine when (under what 
conditions) to practice small-order buying? 

4. What are the advantages and disadvantages of carry- 
ing goods only in definite price lines? This policy often 
means that the margin on different articles varies widely. 
The policy is therefore often in direct opposition to that of 
making each article carry its own expense plus a fair profit. 

5. Is it possible for a dealer to carry full assortments of 
goods and at the same time turn his stock rapidly? Discuss. 
Does the answer to this question depend somewhat upon the 
dealer's location and his volume of sales? 

6. How does the amount of goods necessary to satisfy 
customers vary with the type of merchandise? With the type 
of customers? 

7. Which can use small-order buying to better advantage, 
a dealer in a large city or one in a remote rural district? 

8. Why do some of the chain grocery stores carry more 
articles in stock than they did a decade ago? 

9. The store with a complete stock of goods often has a 
slow rate of turnover and high expenses. It is hard for such 
a store to meet the prices of stores with a limited stock and 
a quick turnover. Under what conditions should a dealer 
carry a large number of articles in stock, if this means rela- 
tively high operating expenses? 

10. It has been proposed that the retailers in the smaller 
cities (say in cities of under 50,000 population) form a work- 
ing agreement as to the lines of goods that each will carry. 
One shoe dealer might agree to carry a full line of narrow 
shoes; another, a complete line of wide shoes; a third, a full 
line of arch support shoes. The stationery store might agree 
to discontinue sporting goods, while the sporting goods store 
would agree to discontinue radios and musical instruments, 
and the music store to discontinue books and magazines. In 
this way the town would have complete lines of all classes of 
goods and so serve its customers better. The convenience and 



Stock Turnover 387 

availability of the goods would draw more trade from the 
surrounding territory and so increase the city's trading area. 

Evaluate this proposal. What are some of the difficulties 
to be faced in securing and maintaining such an agreement? 

11. John and Walter Brown operate a wholesale grocery 
business in a city of 50,000 population. During the year, 
their sales were $2,000,000; their purchases, $1,950,000; their 
inventory on Jan. 1, $250,000; their inventory on Dec. 31, 
$450,000; their expenses, $272,000, including interest at 6 per 
cent on their $600,000 capital; and the salaries for each of 
the owners, $20,000. Compute the rate of stock turnover and 
criticize the conduct of the business. 



CHAPTER 23 

Stockkeeping 

Objects. The objects of stockkeeping are: (1) to 
carry full assortments of goods; (2) never to be over- 
stocked in any item; and (3) to limit the investment in 
stock and speed up the rate of turnover. The ideal is 
always to have on hand every item which is properly in- 
cluded in stock when the customer asks for it and never 
to be overstocked nor to have goods which become un- 
saleable because of spoiling or style changes. This ideal 
may never be fully attained, but the merchant should 
come as close to it as possible. 

Model stock. A model, or balanced, stock is a stock 
that contains all of the items which the dealer carries 
in the right proportions. The stock should be properly 
assorted as to types or kind of goods, models, patterns, 
styles, sizes, colors, and prices. It has been said by an 
eminent merchant * that a retail store should carry com- 
plete assortments of goods in three, and only three, price 
lines. The idea is that a store cannot cater to all classes 
of people, and that it should select its class of trade and 
buy goods at the proper prices for this class of trade. 
This idea does not, of course, apply to a store in a smaller 
town which must serve all the people in the community. 

A stock can be heavy (fat) or light (lean) and com- 
plete or incomplete. The present ideal is to have the 
stock complete and as light as practicable, taking into 

1 Edward A. Filene. 

388 



Stockkeeping 389 

consideration such factors as quantity discounts on pur- 
chases, possible delays in delivery, and dependability of 
sellers. 

One wholesaler 2 gives the following assortment of sizes 
of men's $1.45 shirts for a retailer who carries a mini- 
mum of 90 shirts at this price. 

Size Number of Shirts 

14 6 

\ 1 A 12 

15 24 

15^ 21 

16 9 

163^ 12 

17 6 

90 

The dealer who carries 180 shirts in stock may double 
the number of each size carried in stock. 

Finding the model stock. The above assortment of 
shirt sizes was determined by analysis of the wholesaler's 
sales, stocks carried by retailers in various communities, 
and salesmen's orders for a period of two years. A 
dealer's stock may be based upon an analysis of his past 
sales and upon predicted changes in sales based on 
changes in styles, changes in the purchasing power of 
the community, and shifts in consumer demand. A new 
dealer may set up a model stock from information con- 
cerning the experience of other dealers, perhaps secured 
from wholesalers or manufacturers. 

In analyzing past sales, the dealer should consider the 
trend in sales to see if the sales of a particular article 
are increasing or decreasing. With staples, such as flour, 
canned foods, hardware, and work clothing, the trend 
of past sales gives an accurate basis of forecasting future 

2 Ely & Walker Dry Goods Co. 



390 Stockkeeping 

sales and hence of establishing model stocks. The past 
sales records should be so analyzed as to show seasonal 
sales of each article. 

In the case of fashion goods, past sales records will 
not tell the dealer the colors, fabrics, and designs that 
will be popular in the future. For example, past sales 
records will not tell him how many blue, black, and red 
dresses he will sell during the coming season; they will, 
however, enable him to forecast the total number of 
dresses he will sell, the number of each size, and the 
number at each price. In wearing apparel, past records 
enable the dealer to set up a model stock as to sizes and 
prices. Colors and silhouette may change, but people 
still pay about the same prices for their garments (after 
allowances are made for changes in the price level). 
Sales records also enable the dealer to follow the trends 
in fashions demanded by his customers. 

Stockkeeping systems. In order to control stock, the 
merchant must have a Stockkeeping system. The fol- 
lowing are some of the more important systems: annual 
inventory with inspection of shelves, and want list; 
tickler system or frequent physical inventories; unit con- 
trol or the perpetual inventory system; and dollar con- 
trol. 

Annual inventory with inspection and want list. An 
inventory is an actual count of all of the articles in stock. 
It is often called "taking stock." An annual inventory, 
with frequent stock inspections and a want list, is one of 
the most widely used methods of stock control; in many 
cases, however, it gives the merchant little actual control 
over stock. Under this method the dealer inspects his 
shelves from time to time to see what items are short. 
His salesmen, when making sales, notice items that are 
running low and enter this information on the want list. 



Stockkeeping 391 

Too often, however, they do not notice the condition of 
the stock or they forget to make the entries, and the 
goods are called for by a customer before an entry is 
made on the want list. In such cases, the dealer loses 
not only sales but also the goodwill of his customers. 

The merchant can compute his annual sales of various 
items from his annual inventory figures and from his 
purchase invoices. This can be done, but many thou- 
sands of dealers do not do it. Even when sales are com- 
puted in this way, the dealer has no information as to 
the time of the year when sales are made ; he must trust 
his memory for this information. The dealer, however, 
can set up satisfactory model stocks for goods that sell 
regularly throughout the year. 

Dealers using the system of an annual inventory with 
inspection and want list are usually overstocked in cer- 
tain articles, while they are often out of items requested 
by customers. This method can, however, be made fairly 
effective if the dealer has his stock well arranged, if he 
carefully and frequently examines his shelves, and if the 
salespeople are very careful to report all items that are 
low. One store has red flags or markers on its shelves 
and drawers. These -are normally kept turned down out 
of sight. Whenever a salesman finds that some item is 
getting low, he turns the flag up without delaying the 
customer and without waiting to finish serving the cus- 
tomer. The merchant then goes over his shelves daily, 
comparing the stock of all items marked with red flags 
with his model stock figures and placing orders for all 
that are down to the minimum quantity. 

Tickler system. The tickler system consists of taking 
frequent physical inventories usually every month or 
every week; many stores take monthly inventories; the 
salespeople may remain a few minutes each night and 



392 



Stockkeeping 



make a detailed count of all items in one department or 
one line. Other stores may have the stock inventoried 
during regular hours when there are no customers in the 
department. A large store may have two or more people 
who spend all of their time inventorying its goods. Fre- 
quent inventories often lead to simplified stocks and to 
a better arrangement of goods, as the employees devise 



LINE OF GOODS 


OR DEP'T) 


ARTICLE 


SIZE OR 
STOCK 
NO. 


UNIT 


COST 


SELL- 
ING 
PRICE 


SOURCE 


IDEAL 
STOCK 


DATE 


DATE 


ON 
ORDER 


IN 
STOCK 


ON 
ORDER 


IN 
STOCK 












^O 


^\ 


^ 


\^ 


^-* 


^\ 



Fig. 29. Form for stock record. This form has space for the de- 
scription of each article size or stock number, stockkeepmg unit, cost, 
selling price, source of supply, and ideal stock on each line. Many 
articles can be entered on one card or sheet. Space at the right is 
provided for successive inventories, which are then compared with the 
ideal, or model, stock. A wider form than that shown here should be 
used so that several inventories can be entered on one line. All articles 
on one card are to be inventoried on the same date. 

methods of reducing the work. Overstocks are disposed 
of and the rate of turnover is increased. 

The unbroken packages are counted as such, and 
only the items actually on display or in broken packages 
need be counted individually. Fixtures are often de- 
vised so that a compartment on a table, a section of 
shelf, a drawer, or a bin holds a definite quantity of an 
article. The number of vacant places are noted and the 
amount of each item on display is determined. To il- 
lustrate, if a section of a table holds 72 items and there 
are 4 vacant spots, the clerk knows that 68 items are on 
display. If these same goods come 144 in a box, and 3 



Stockkeeping 393 

unbroken boxes are in stock, then there are 500 items in 
stock. At times, goods of uniform weight are weighed 
and the number is computed in this way. 

The dealer compares the number of items in stock, as 
shown by his inventories, with the number which should 
be in stock, as shown by his ideal or model stock and 
places orders accordingly. When the ideal stock is de- 
termined, it may be entered on the left hand of the stock 
record, and the columns at the right may be used for en- 
tering the successive inventory figures. The dealer must 
consider the number of articles on order (ordered but 
not received), as well as the number actually in stock, be- 
fore he places additional orders. (See Fig. 29.) 

Frequent inventories enable the dealer to compute the 
sale of each article for each season of the year. This 
enables him to have large stocks when the goods are 
most in demand and small inventories when the goods 
are least in demand. The inventory figures also enable 
him to compute sales trends during the year. If he 
takes monthly inventories, he can watch the sales trend 
of each article month by month, and increase or decrease 
the quantities purchased accordingly. 

Unit control, or perpetual inventory. Unit control is 
a method by which a concern keeps a constant account of 
the number of all articles in stock. In order to start 
the system, the number of each article in stock is ob- 
tained from a physical inventory. Every time any goods 
are received, the number is added to the number in 
stock; when any goods are sold, the number is deducted. 
Thus if a store had 25 cartons of % inch black type- 
writer ribbons in stock, and 100 cartons are received, the 
100 is added to the 25 and the record shows 125 cartons 
in stock. If 15 cartons are sold, 15 is deducted, and the 
record shows 110 cartons in stock. This method is 



394 



Stockkeeping 



usually called a perpetual inventory by factories and unit 
control by retail stores. Fig. 30 shows a simple form 
used for this kind of inventory method. 

The balance shown on the inventory record must be 
checked from time to time with the amount actually in 
stock as found by a physical inventory. The balance 
shown on the stock sheet may be adjusted when the 



ARTICLE. 



STOCK No. OR SIZE- 



UNIT (1 ARTICLE, CASE,DOZ.,GROSS)_ 

SOURCE x 

(M N F X R OR WHOLESALER; 



SELLING PRICE. 



MINIMUM 
QUANTITY- 



COST.. 



QUANTITY 

TO 
. ORDER 



DATE 



R'C'D SOLD DATE H gfl D R^D SOLD DATE 



R'C'D SOLD 



Fig. 30. Form for unit stock control. A separate card or sheet 
is used for every article. Information as to accounting unit, stock num- 
ber or size, cost, etc., is entered at the top of the card. Only one line 
is needed to enter a day's transactions. As the form has a number of 
columns, one sheet will last for a considerable period of time. 

periodical inventory is taken, or the stock clerk or clerks 
may spend a part of their time each day in counting the 
number of various items in stock. Records may be kept 
of sizes, models, colors, prices, and makers of the goods. 
Information concerning receipts may be obtained from 
the purchase invoices. Information as to sales is obtained 
from price tags or labels on the goods which are torn off 
when sales are made, or from the sales slips. When the 
sales slips are used, the salespeople must be very careful 
to write the necessary information as to stock number, 
size, or color on the sales slips. 



Stockkeeping 395 

Unit control may be used with goods on display or only 
with reserve stock in the stockrooms. 

Advantages of unit control. Unit control enables the 
merchant to know at all times just how much of each 
item is in stock. The stock clerk watches his records and 
whenever the balance of any article on hand is less than 
the specified minimum quantity, he fills out an order 
blank or notifies the buyer. When the system works per- 
fectly, the merchant is never out of stock, unless a large 
or unusual demand occurs or unless his supply of goods 
is delayed unexpectedly. The system likewise enables 
the merchant to watch his sales more closely than is 
possible with any other system. Items that are selling 
very slowly may be discontinued, and articles with in- 
creasing sales are bought in larger quantities. 

Disadvantages of unit control. The two principal dis- 
advantages of unit control systems are high cost and 
inaccuracy. The clerical work involved in keeping rec- 
ords involves expense. The cost of operating a unit con- 
trol system runs from 0.2 to 1 per cent of sales. 8 It is 
sometimes said that it is practical to operate a unit con- 
trol system for display stock when the selling price of 
the items is $5.00 or more. With smaller items the cost 
is said to be prohibitive. If the store keeps reserve 
stocks, unit control can be used for the reserve stocks 
even for small items, such as hosiery and toilet articles. 
Entries on the stock records are made only when goods 
are received or taken from the reserve stock. As goods 
are usually taken from the stockrooms in fairly large 
amounts, the cost is not excessive. In order to reduce 
the cost of keeping a perpetual record of goods on display, 
various short-cut methods may be used. The tags or 



3 Nystrom, Paul H., Economics of Retailing, 1930 ed., Vol. 2, p. 428. 



396 Stockkeeping 

tickets for goods sold are collected daily and sorted, and 
one entry is made for all sales made during the day. To 
save the work of making a new entry every time a sale 
is made, the number of items on hand may be repre- 
sented by marks, thus, ///////// When an item is sold 
it is crossed off, thus, ///////A- The number of un- 
crossed lines shows the quantity in stock. 

Some concerns have discontinued the perpetual inven- 
tory because it was so inaccurate that they felt it was 
useless or not worth its cost. Salespeople may fail to 
drop the tags or tickets into the boxes, or may give the 
wrong information on the slips so that the stock clerk 
deducts the sale from the wrong article. The stock clerks 
may make errors. Returned goods also give trouble. 
Goods are charged off the record when sold, and if the 
goods are returned, a record of this fact must be given 
to the stock clerks or the record will be inaccurate. If 
the goods are accepted on the sales floor and returned 
to stock without a record going to the stockkeeping de- 
partment, the stock record is bound to be wrong. When 
it is remembered that in some shopping lines sold by 
downtown stores, from 5 to 25 per cent of the goods are 
returned, it is seen that this is no small problem. If the 
unit control method is used, it should be used with great 
care so that it will be accurate. 

Unit control used by a chain of stores. A chain of 
women's apparel stores has a unit control system, all rec- 
ords being kept in the main office. Each store mails in 
daily tags from all garments sold during the day so that 
the head office constantly knows how many garments of 
each design, size, price, and color are in each store. The 
sales of each store are watched closely and the buying 
of goods becomes almost an exact science. This chain 



Stockkeeping 397 

was reported to have had the greatest increase in sales of 
any national chain in 1930 32.7 per cent. 4 Other chains 
use tabulating machines and punched cards, a card 
being mailed to the central office daily for each item sold. 
Dollar control. Dollar control (or financial merchan- 
dise control) consists of keeping account of the goods in 
stock in dollars rather than in units, or pieces, of mer- 
chandise. When goods are received, they are entered on 
the stock record at their sales value. When they are 
sold, their value is deducted and the balance shows the 
value of the goods in stock at selling prices. In using 
this system, departments are broken down into lines of 
classifications. For example, a small store divides its 
men's furnishings into shirts, neckwear, gloves, socks, un- 
derwear, nightwear, and miscellaneous. The stock record 
shows the value at selling prices of the goods in each line 
at all times. If the stock of shirts is too large or too 
small (as shown by comparison with the model or 
planned stock figures for this date), the dealer must 
inspect or count the goods to find which patterns, sizes, 
or colors are out of proportion. A larger store may divide 
its shirts into collar and neckband styles and then divide 
each style according to prices and sizes. The record may 
show that the merchant has too few $1.45 collar-attached 
shirts in size 15. He must then inspect his stock to find 
what colors or patterns are short. 5 



4 The Business Week, March 11, 1931. 

5 Dollar control is used with the retail method of inventory, under 
which stock records are kept at selling prices and not at cost. This 
method facilitates taking stock. When the inventory is taken at cost, 
it is necessary to decide the costs on all merchandise, a procedure 
which takes time and often causes errors. Dollar control is now gen- 
erally used in the more progressive retail stores, but it must be used 
with great care, as accurate records must be kept of all mark-ups and 
mark-downs. 



398 Stockkeeping 

Advantages of dollar control. With dollar control a 
record is kept of the value of goods in each classification 
at all times. Dollar control costs much less than unit 
control, because only the total values of purchases and 
sales are entered. A classification may contain several 
dozen or several hundred different items. With unit con- 
trol the sales of each of these items must be recorded, 
whereas with dollar control only the total day's sales in 
the classification is entered on the stock record. Dollar 
control is thus applicable to small goods where the cost 
of unit control is prohibitive. Dollar control fits in nicely 
with the operation of a store's budget. 

Disadvantages of dollar control. Dollar control does 
not give complete control of stock. The value of the 
goods in a classification may be satisfactory, and yet the 
stock may be poorly assorted. The dealer may have the 
proper investment in $1.45 shirts, size 15, but have a 
poor assortment of colors. To be really effective, dollar 
control must be supplemented with frequent inspections 
of the stock. It may be used with unit control or any 
other method of physical stockkeeping. 

Short-cut methods. Some short-cut methods are used 
by dealers who want to prevent out-of -stock reports and 
yet save the cost of a complete stock control system. 
One method is to label the minimum quantity which it 
is safe to carry. Thus, if one case is the minimum quan- 
tity, a label or card is placed on the case at the bottom 
of the pile or on the case at the rear of the shelf. When 
the salesman or stock clerk opens this case, he drops the 
label into a box and the buyer knows that an order should 
be immediately placed so that a new supply may be re- 
ceived by the time the case is sold. The red flag system 
mentioned above was used for the same purpose. 



Stockkeeping 399 

Chapter 23 

Review Questions 

1. What is meant by stockkeeping? 

2. What are the objects of stockkeeping? 

3. What is meant by a model stock? 

4. What is meant by a light inventory? A heavy inven- 
tory? A complete inventory? An incomplete inventory? A 
balanced inventory? An unbalanced inventory? 

5. How should an established dealer determine the goods 
needed for a model stock? 

6. How may a new dealer (or an old dealer who does not 
have the necessary past records) determine the goods needed 
for a model stock? 

7. Can a model stock be fixed for style goods? 

8. What are the important stockkeeping systems? 

9. What is the most widely used system among retailers? 

10. What is a physical inventory? 

11. Can a satisfactory stock control system be operated 
when an inventory is taken only once a year? If so, how? 
If not, why? 

12. What is a tickler system of stock control? How is it 
operated? 

13. Can the tickler system be made effective without ex- 
cessive cost? 

14. What is unit control? Explain its operation. 

15. What are the advantages of unit control? 

16. What are the disadvantages of unit control? 

17. How may a unit control system be used for a chain of 
stores located in widely separated towns? 

18. What is meant by dollar control? 

19. How is a dollar control system operated? 



400 Stockkeeping 

20. What are the advantages of dollar control? 

21. Name the disadvantages, or limitations, of dollar control. 

22. How can goods in stock be labelled to prevent out-of- 
stock reports? 

Thought Problems 

1. Which system or systems of stock control are adapted 
to the needs of the following types of retail stores: large de- 
partment stores; large hardware stores; medium sized drug 
stores; small grocers; medium sized shoe stores; small 
women's clothing stores; small men's furnishing stores? 

2. Which system is adapted to the needs of a wholesale 
grocer? A wholesale hardware dealer? 

3. MacMillan Bros, conduct a retail hardware store in a 
town of 5,000 population. They have taken stock only once 
a year, and they depend upon inspections of the stock or want 
slips to tell them when they should order additional goods. 
The traveling salesmen often inspect their shelves and tell 
them what they need in their lines. They have many more 
goods than they need, their turnover being very little more 
than once a year. In spite of this, they must often tell cus- 
tomers that the desired goods are out of stock. It often hap- 
pens that the goods are actually in the store or stockroom 
but are misplaced or hidden under other goods. The brothers 
realize their entire stockkeeping system needs improving. 

They ask you to work out a tickler system adapted to their 
needs. Describe the system which you would recommend and 
draw up the necessary stockkeeping forms. How would you 
go about setting up or determining their model stock? 

4. Johnson & Edwards, Inc., operates a men's clothing 
store. They want to install unit control for suits, overcoats, 
and shoes, and dollar control for their furnishings. 

(a) Draw up the proper system for their coats and suits, 
showing samples of any stockkeeping forms needed. 

(b) Do the same for their shoes. 

(c) Do the same for their furnishings. 

(d) Show how they should determine their model stocks. 



CHAPTER 24 
Stock Arrangement and Display 

Objects. The objects of stock arrangement and dis- 
play are to increase the sale of goods and to have the 
goods easily accessible to the customers and salespeople. 

Arrangement. In laying out his store, the merchant 
wants to arrange his goods so that the profitable goods 
will be given the best locations; so that the store will 
have an attractive appearance ; so that customers will be 
drawn far enough into the store to see other goods than 
those for which they entered;- so that the goods will be 
convenient to the customers; so that salespeople can ob- 
tain the goods quickly, display them properly, and wrap 
them and make change in the minimum time; so that 
the sale of new goods can be promoted ; so that the neces- 
sary privacy is afforded customers in selecting such goods 
as wearing apparel; and so that store services can be 
properly handled. . 

Location and rent. The front part of the store is the 
most valuable part of the building. In a building 100 
feet deep, the front 10 feet are estimated to represent 
about 25 per cent of the value of the entire first floor. 
The next 20 feet represent 25 per cent of the value ; the 
next 30 feet, 25 per cent; and the rear 40 feet, the re- 
maining 25 per cent. Thus if a store room 40 x 100 feet 
rents for $4,000 a year, the average rent is $1 per square 
foot. The front 10 feet are worth $1,000, or $2.50 per 
square foot. The next 20 feet have a value of $1,000, or 

401 



402 Stock Arrangement and Display 

$1.25 per square foot. The next 30 feet have a rental 
value of $1,000, or 83%^ per square foot, while the rear 
40 feet have a rental of $1,000, or 62%^ per square foot. 
In a store of two floors, the first floor is usually assigned 
65 per cent of the rent and the second floor or the base- 




E; 

Courtesy National Retail Hardware Assn. and U. S. Chamber of Commerce. 

Fig. 31. Old type of hardware store before remodeling. 

merit 35 per cent. In a store with more floors, the main 
floor bears a smaller percentage of total rent. 1 

Because of the high value of the space near the front 
of the store, goods are often placed there which have a 

1 Various rules have been worked out for assigning value to lots of 
different depths. The Hoffman Neill rule takes a lot 100 feet deep as 
100 per cent, and expresses the value of other depths as percentages. 
Thus one foot has a value of 6.8 per cent; 5 feet, 17.3 per cent; 10 
feet, 26.0 per cent; 20 feet, 39 per cent; 30 feet, 49.5 per cent; 60 feet, 
74.2 per cent; 80 feet, 87.7 per cent; and so on up to a 200 foot lot 
which has a value of 130 per cent. 



Stock Arrangement and Display 403 

high volume of sales per square foot or which carry a 
high margin. In a department, clothing, or dry goods 
store, the space near the front door is often used for 
hosiery, men's furnishings, lingerie, jewelry, handbags, 
gloves, toilet goods, novelties, handkerchiefs, furs, or 
goods on special sale. The front space may also be used 
to build sales for new goods or goods which do not seem 
to be selling as they should. Impulse goods are often 
placed near the front of the store so that customers will 
see them while going to the rear of the store for shopping 
goods or for staples. 

Appearance. In order to secure a pleasing appear- 
ance, such goods as overalls and knit underwear are 
usually kept away from the front entrance. Goods of 
attractive colors and pleasing appearance are often placed 
near the front and along the main aisles. Low fixtures 
are now generally used so that the customer can get a 
view of the entire floor from any one place. Clean mer- 
chandise and fixtures, bright lights, and colorful displays 
add to the attractiveness of a store. 

Drawing customers deep into the store. In order to 
draw customers deep into the store, the merchant often 
places his shopping goods, articles on sale at especially 
low prices, or staple necessities well toward the rear or on 
upper floors. Because customers expect to devote some 
time to the selection of shopping goods, they usually do 
not object to going to the rear of the store or to upper 
floors for them, and on the way they often see other 
goods which they need. Goods on special sale are often 
placed well back from the entrance for the same reason. 
Staple necessities may also be placed well back in the 
store. Care, however, must be used in doing this. 
People want some convenience goods, such as cigarettes, 
periodicals, toothpaste, razor blades, and sodas, in a hurry 



404 Stock Arrangement and Display 

and do not like to walk to the back of the store for them. 
The drug store may compromise and place the fountain 
half way back. 
Customers' convenience. The store should be con- 




Courtesy National Retail Hardware Assn. and 77. S. Chamber of Commerce. 

Fig. 32. Same hardware store shown in Fig. 31 after remodel- 
ing. Note the low wall shelves and the open display tables arranged 
in aisles in the center of the store. The counters have disappeared. 
The remodeled store looks betber and increases sales by a 'better display 
of goods by the placing of goods where they are easily accessible to 
the customers. 

venient to the customers. They become accustomed to 
finding goods in certain places, and, other things being 
equal, the goods should be kept in these places. Related 
goods commonly bought or used together are often dis- 
played together (ensemble displays). Thus, instead of 
having all shoes in one department, men's shoes may be 
placed next to men's clothing, women's shoes near 



Stock Arrangement and Display 405 

women's clothing, and chil- 
dren's shoes with children's 
clothing. Hosiery is often 
kept adjacent to shoes. 
Children's clothing is often 
close to women's clothing, 
as most children's clothing 
is bought by women. In 
line with this development, 
the food store is replacing 
the former grocery store, 
butcher shop, and green 
goods store. 

Facilitating sales. Goods 
should be so arranged that 
they are easily accessible to 
the salespeople and that 
proper space is available for 
showing them to the custom- 
ers. The arrangement of 
store fixtures and the loca- 
tion of wrapping counters, 
scales, cash registers, and 
credit telephones or tubes 
affect the time it takes sales- 
people to make sales; and 
the dealer wants to secure a 
high volume of sales for 
each salesperson. 

Promoting sales of new 
goods. New goods may be 
given display space on tables 
or counters or in preferred 
locations although immediate sales do not justify the 




Courtesy The Progressive Grocer. 

Fig. 33. Chart showing 
wasted steps in a store with a 
poor arrangement of stock and 
fixtures. The wasted steps take 
time and increase selling expense. 



406 Stock Arrangement and Display 

expense. This is done to build sales for the future or to 
find the sales possibilities of the goods. Slow-moving 
goods may also be displayed in preferred locations in the 
hope of increasing their sale. Goods which do not sell 
well in one location are often greatly benefited by a 
change of location. The dealers should carry on a cer- 
tain amount of experimenting all the time. 

Privacy. Some goods, such as wearing apparel that 
needs to be fitted, arc best placed near the rear of the 
store, on side aisles, or on upper floors. Many customers 
like a certain amount of privacy in the purchase of such 
goods. 

Store services. A store should be so arranged that it 
can properly serve its customers in such matters as de- 
livery, repair and alteration of goods, storage of goods, 
and extension of credit. Proper facilities, such as locker 
and rest rooms, are needed for the store employees. 
Some stores operate restaurants and lunch rooms. Such 
stores need facilities for receiving and storing the neces- 
sary foods. 2 

Display. Some stores hide their goods and bring them 
out only as requested by the customers. This method 
is used to some extent by exclusive shops in selling wear- 
ing apparel. A method that is much more generally suc- 
cessful is to put the goods out where the people can see 
and feel them. Good salesmanship uses as many of the 



2 In designing buildings, the architect must remember the necessary 
plumbing connections for restaurants, soda fountains, barber shops, and 
beauty parlors. In wiring a building, it is important to allow the 
necessary outlets for overhead, display case, and window lights; fans; 
and demonstrating lamps, washing machines, irons, lighting fixtures, 
radios, stoves, heaters, and cleaners. Facilities must be planned for 
heating, ventilating, and often cooling the store building. Many 
stores are now air-conditioned, so that they maintain a uniform tem- 
perature and humidity the year around and filter the dirt from the air. 




uoiirirxu me progressive Grocer and, U. S. Chamber of Commerce. 

Fig. 34. Layout of a modern grocery store. Note that the 
shelves are low so that all goods can be easily reached; that the scales 
md cash register are in the rear to draw customers to the back of the 
store so that they have the opportunity to see other goods that they 
aeed; and that the island arrangement of fixtures allows free circula- 
/ion of customers and places goods within easy view and reach. This 
:>lan can be used in a building as narrow as 22 feet. A candy; B 
-obacco; C bakery goods; D refrigerator for meats, butter, etc.; 
E special displays of such goods as dried fruits; F table display of 
Dackaged goods. See Fig. 14 in Chapter 9 for layout in narrower room. 
\ wrapping table with scales and cash register in the front of the store 
vould save much time in selling produce. 

407 



408 Stock Arrangement and Display 

five senses sight, touch, hearing, taste, and smell as 
possible. 

Approved present display methods involve placing all 
except the more delicate and valuable goods on open 
display tables or shelves where they are easily accessible 
to the customers. Long counters are not used. The 




Courtesy A. /. Luther <& Co. and U. S. Chamber of Commerce. 

Fig. 35. Modern display table. Note that goods are placed on 
top with price tags within easy reach of customers, while additional 
items and reserve stock are stored underneath. 



wall shelves are open to the customers, or samples are 
displayed on panels attached to the doors of the cabinets. 
Small tables and fixtures which are movable are used so 
that they can be rearranged easily. The only counters 
used are those necessary for the scales, cutting devices, 
and the wrapping of packages. The salespeople sell on 
the floor with the customers rather than from behind 
counters. The best grade of goods, goods easily soiled or 



Stock Arrangement and Display 409 

broken, and valuable goods, such as high-grade jewelry, 
may be kept in show cases or in drawers. 

Fixtures. Fixtures should be clean and attractive. 
They should not be so conspicuous that they attract at- 
tention to themselves. Their purpose is to display mer- 
chandise not to be admired. For this reason they 
should be painted white or some dull color that does not 
attract attention and that makes a good background for 
the merchandise. Relatively cheap, wooden fixtures that 
are repainted frequently and kept spotlessly clean are 
satisfactory for most types of stores. Fashions in store 
fixtures change, and the newest fixtures of today may be 
obsolete in 10 or 20 years. Expensive fixtures therefore 
may involve heavy depreciation charges. 

Tables. Display tables are usually about 34 inches 
high and 30 inches wide. Goods are displayed on top, 
while drawers or shelves are placed below for reserve 
stock. It is desirable to have the drawers on ball bear- 
ings. The bottom drawer or shelf should be raised 6 
inches to permit cleaning the floor. (See Figure 35 on 
page 408.) 

Wall fixtures. Wall fixtures seven feet high are rec- 
ommended. This enables the salespeople and customers 
to reach all the merchandise without using ladders or 
stools. Since the eye seldom goes higher than seven feet, 
there is very little display value in the upper shelves of 
higher fixtures. Wall fixtures for many types of mer- 
chandise (shoes are an exception) need a display ledge 
the same height as the tables for showing goods to 
customers. Some stores still use higher wall fixtures, but 
those that have installed the lower shelves usually find 
that they are able to display all of the necessary goods. 
The upper shelves in the past have too often been used 
for carrying dead stock. 



410 Stock Arrangement and Display 

Display cabinets. The recommended height for cabi- 
nets and other fixtures is five feet. This height allows 




Courtesy Good Hardware. 

Fig. 36. Display panels in modern hardware store. Samples 
are displayed on the panels. Goods for sale are stored on shelves 
behind the panels. 

the customer a free view of the store. Higher fixtures 
may be used in or around departments, such as clothing, 
where the customers want privacy. 



Stock Arrangement and Display 411 

Merchants who have changed from the old to modern 
fixtures have often felt that they could not find room 
for all of their goods on the tables and lower wall shelves. 
As a rule, however, they have been able to display all 



.--* COUNT* 




5 




Courtesy The Progressive Grocer and U. S. Chamber of Commerce. 



Fig. 37. Diagram of layout for modern grocery store. Note 
dimensions to help in location of fixtures. 

of the necessary goods in the new fixtures. Many found 
that they had many goods in stock which should be dis- 
continued, but some had to transfer a portion of their 
goods to their stockrooms. 

Customer frontage. One of the primary goals of store 
arrangement is to increase customer frontage, by which 



412 Stock Arrangement and Display 

is meant the number of lineal feet of fixtures upon which 
goods are displayed to the customer. Some merchants 
have doubled their customer frontage by adopting mod- 
ern "model" layouts. 

Window display. The display windows are the most 
valuable space in the store. Some writers place the value 
of the windows as high as 25 per cent of the rent of the 
first floor. Window displays are designed to attract at- 
tention, to get people interested in the merchandise, to 
get people into the store, to build goodwill for the store, 
and to make sales. Windows may display merchandise 
which is for sale, may show demonstrations of how goods 
are made or used, or may present novelties or spectacles 
which attract attention regardless of their reference to 
the store's business. A display of war souvenirs by a 
grocery store would be a novelty display. It might at- 
tract a great deal of attention but would scarcely suggest 
the purchase of groceries. 

Types of windows. The size and type of windows 
vary with the goods to be displayed. The display of 
furniture needs a large window, perhaps 14 to 16 feet 
deep, while cigars, jewelry, and drugs may use a window 
2 to 4 feet deep. The proper height above the sidewalk 
also depends upon the goods to be displayed. Large 
items like furniture should have low windows, say 16 
inches above the sidewalk, while small items like jewelry 
require higher floors in the windows to bring the goods 
displayed up closer to the eyes of the passers-by. 

Windows may be blind or open. Blind windows have 
backs which shut them off from the stores. Such win- 
dows are easier to light than open windows, are easier to 
arrange, are adapted to a greater variety of displays, and 
concentrate the attention of the passers on the window 
displays. With the use of artificial light in the store, 



Stock Arrangement and Display 413 

blind windows have come into common use, especially 
among wearing apparel and drug stores. Open windows 
allow the passers-by to see into the store and, in a sense, 
make the entire store a display window. Open windows 
also allow the store to secure more natural light, although 
some authorities feel that this is a doubtful advantage. 
Open windows are often used by grocery, furniture, 
automobile, and farm implement stores, and restaurants. 

Building the display. The first thing a display should 
do is attract attention. Attention may be secured by 
life, action, noise, color, light, size, demonstrations, or 
novelties. A window with live animals (e.g., chickens 
or rabbits) attracts much attention. Relatively few dis- 
plays, however, can use life to attract attention. The 
merchant can nevertheless suggest life by scenes showing 
hunting, camping, fishing, or racing scenes, or showing 
the use of the products. Action may be secured by arti- 
cles in motion, such as mechanical devices, machines in 
operation, and the flashing on and off of lights. A buz- 
zer is occasionally used to attract attention by noise. 
Music or a loud speaker may be used for the same pur- 
pose. 

Colors, especially bright colors, catch the eye and se- 
cure attention. Flowers, fruits, women's apparel, dry 
goods, wall paper, and meats can be relatively easily 
used to attract attention by their colors. The use of 
light to attract attention is discussed below. 

The merchant who fills his window entirely full of 
some article (soap, for example) attracts attention by 
the unusual size of the display. This is known as mass 
display. Demonstrations, when well staged, and novel- 
ties, when well displayed, are excellent for attracting 
attention. A common fault of such displays is that they 
do not tie up with the goods which the store has for sale. 



414 Stock Arrangement and Display 

Window displays should be symmetrical and balanced. 
The interest should be centered in the goods. The back- 
ground stands, and accessories, such as ribbons, flowers, 
and crepe paper, should make a background for the goods 
and should not themselves attract attention. 

Windows should not be overcrowded. Some display 
men favor putting only a few articles in a window and 




Courtesy Good Hardware. 

Fig. 38. Display window of a hardware store featuring sport- 
ing goods. Goods carried by hardware stores permit many appealing 
displays of hunting goods, fishing equipment, camping outfits, sporting 
goods, and so forth. . 



concentrating attention on these. They say that crowded 
windows divide the attention of the passer-by so that 
his desire is not aroused for any one thing. Stores selling 
the higher priced or "exclusive" goods most frequently 
devote an entire window to displaying one or two articles. 
Other display men say that windows should be reason- 
ably well filled. They argue that the windows are too 
valuable to be only partly filled. They say that if a 
passer-by is not interested in one article, another may 
attract his attention. This seems to apply to stores 
selling small convenience goods, as drug sundries. If 



Stock Arrangement and Display 415 

one doesn't need toothpaste, he may need razor blades, 
hair tonic, soap, or shaving cream. 

The merchandise displayed should be properly la- 
belled and should bear legible price tags. The absence 
of prices leads the passers-by to think that the goods are 
so high priced that the dealer is afraid to display his 
prices. The only stores which should omit the price tags 
are those catering to a very exclusive trade. 

Above all, the window should be clean; the merchan- 
dise and background should be clean ; the displays should 
be changed frequently; and the window should be well 
lighted. 

Store lighting. Light attracts attention, allows cus- 
tomers to inspect goods quickly, gives the store a cheer- 
ful atmosphere, makes the goods appear clean and 
attractive, increases sales, and reduces the number of 
returned goods. One women's wear store across the 
street from a theater found that with its windows un- 
lighted only 35 per cent of the people used its side of 
the street during the evening hours. It lighted its win- 
dows and found that 53 per cent of the people used its 
side of the street. With weak lights 2 l / 2 per cent of the 
people stopped to look at the displays. With strong 
light 34 per cent stopped. Another store improved the 
lighting of its store, and the percentage of returned goods 
dropped from 29 to 12 per cent. A drug and stationery 
store had one-half of its lights turned on one cloudy day. 
All of the lights were turned on, and sales increased 68 
per cent. 

Window lighting. Windows should be brightly 
lighted. The amount of light needed will depend some- 
what upon the amount used by adjacent stores and the 
color of merchandise and background in the windows. 
For a window to stand out from its neighbors, it must 



416 Stock Arrangement and Display 

have more light or must have colored light. Dark colors 
absorb more light than light colors. Therefore windows 
containing dark goods need more light than those con- 
taining light-colored goods. For most stores 200 watt 
light bulbs placed from 12 to 24 inches apart should be 
satisfactory. The lights should be kept clean and re- 
placed before they are worn out. The lights should be 
so placed that they shine on the displays and so that 
there is no glare in the eyes of the people on the street. 

Interior lighting. Well-lighted interiors facilitate the 
sale of goods and enable the customers to examine goods 
to better advantage. Light stimulates action. Brightly 
lighted stores enable customers to buy more quickly. 

The amount of light needed varies with the color of 
the walls, fixtures, and merchandise. Dark walls need 
more light than light walls. Overhead lights should not 
be further apart than one and one-half times their 
distance from the floor. Thus lights placed 10 feet from 
the floor should not be over 15 feet apart. Nystrom 
points out that the average intensity of light used on the 
main floor of department stores is about 1.27 watts per 
square foot, which means that if lights are placed 15 
feet apart, each fixture must have 286 watts. Somewhat 
less light is ordinarily used on upper floors. The light 
bulbs and fixtures should be kept clean. Lights should 
be so arranged that there is no glare, and the lights 
should be evenly diffused so that no places are dimly 
lighted. Using more lights and placing them closer to- 
gether enable the light to be better controlled. 

There are three types of lighting fixtures: direct, in- 
direct, and semi-direct. With a direct fixture, the light 
shines directly on the goods. This is the poorest type 
of lighting. With indirect fixtures, the light is thrown 
on the ceiling and reflected on the goods. This gives 



Stock Arrangement and Display 417 

the most perfect diffusion but requires much more 
current and therefore is more expensive than direct 
lighting. The semi-direct fixture allows some light to 
shine through the globe, while some is reflected down- 
ward from the ceiling. Considering both results ob- 
tained and cost, semi-indirect lighting is often the most 
practical. 

Chapter 24 
Review Questions 

1. What are the objects of stock arrangement and dis- 
play? 

2. What are the factors determining the proper location 
of goods in a store? 

3. What type of goods are placed near the front of the 
store? Why? 

4. How is the rental cost of a store distributed to the dif- 
ferent parts of the building? 

5. How does appearance affect the location of goods in a 
store? 

6. What devices do merchants use to draw customers to 
the rear of their stores? 

7. How should goods be arranged to meet the convenience 
of the customers? 

8. How may a store be arranged to save the time of the 
salespeople? 

9. Why are new goods sometimes given preferred location 
in the store? 

10. What consideration should be given to service facilities 
in providing the store building and arranging the goods and 
fixtures? 

11. What rules should be followed in providing store fix- 
tures? 



418 Stock Arrangement and Display 

12. What about the color of fixtures? 

13. What use does the modern store make of display ta- 
bles? What is the proper size of such tables? 

14. What type of wall fixtures are recommended at pres- 
ent? Why? 

15. Why are low cabinets favored? 

16. What is the value of the store's windows? 

17. What are the objects of window display? 

18. What may be displayed in show windows? 

19. What determines the proper size and height of a store 
window? 

20. What are the advantages of blind and open windows? 

21. How may a window display attract attention? 

22. What rules should be followed in building window dis- 
plays? 

23. How much merchandise should be displayed in a win- 
dow? Does this depend on the type of goods? 

24. Why does a drug store sometimes put a great many 
goods in its windows? 

25. Should goods in a display window be labelled with their 
prices? Why or why not? 

26. What is the value of well-lighted windows to a store V 

27. What are the rules for lighting store windows? 

28. Why should store interiors be well lighted? 

29. What are some rules for lighting store interiors? 

30. What are the three types of lighting fixtures? 

Thought Problems 

1. What is meant by ensemble displays? 

2. When should convenience goods be placed in the rear 
of the store and when should they be placed near the en- 
trance? 



Stock Arrangement and Display 419 

3. A store advertises a special sale of hosiery. Under 
what conditions should the hosiery be placed near the en- 
trance, and under what conditions should it be placed in the 
rear of the store or on an upper floor? 

4. A store selling women's shoes has no shoes in sight 
except a few pairs in display cabinets and in the show win- 
dows. When a customer comes in, she is seated and her foot 
is measured. The salesman then goes behind a partition and 
brings out a pair of shoes. If this pair is satisfactory, no 
other shoes are shown the customer. 

(a) Is this a good method of displaying and selling shoes? 
Why or why not? 

(b) If you feel that this method has some merit, to what 
types of goods or to what types of customers is it applicable? 

5. How is customer frontage increased by well-designed 
layout? 

6. Cohen Bros, have a one-floor-and-basement store han- 
dling the following lines of goods: women's hosiery; women's 
gloves; women's underwear; furs; handkerchiefs; towels; 
women's coats; dresses; notions; handbags and novelties; 
men's furnishings; men's suits and overcoats; work clothing, 
including overalls, shirts, pants, socks, and shoes; house 
dresses; women's shoes; men's dress shoes; blankets and bed- 
ding; luggage; and kitchen supplies, such as cooking uten- 
sils, cutlery, and woodenware. 

(a) Which lines should be placed in the basement and 
which on the street floor? 

(b) The street floor is wide enough for a main aisle and 
two side aisles, all three aisles running lengthwise of the store. 
Draw a diagram showing the proper arrangement of the lines 
which you would place on the street floor. 

7. Alfred Jones pays $12,000 a year rent for the first and 
second floors of a building on First Street, where he conducts 
a men's clothing store. The building is 100 feet deep and 50 
feet wide. What is the rental value per square foot of the 
first floor? Of the second floor? What is the square foot 
rental value of the various parts of the first floor? 



CHAPTER 25 

Buying 

Success in buying. Successful buying depends upon 
knowledge of demand, quality, and prices. In carrying 
on his work, the buyer needs bargaining ability, for there 
is still much higgling over prices and terms. The buyer 
should be industrious in seeking out sources of supply, 
in shopping for the best goods and prices, in examining 
goods, in gathering information concerning the goods 
offered and the reliability of the sellers, and in inter- 
viewing salesmen. Much statistical information is 
needed, and a good filing system to keep information 
available at all times is necessary. The buyer should 
have a good personality to enable him to secure infor- 
mation and the cooperation of the salesmen. 

Present demand. Present demand is found from rec- 
ords of current sales and from want slips (records of 
articles asked for by customers which are not in stock). 
Stock control systems have been explained previously. 
With such a system, the buying of staple goods becomes 
almost automatic the record shows when more goods 
are needed and the source of supply, and orders are 
placed in the regular routine of the business by the order 
clerks or assistant buyers. 

Future demand. Estimating future demand is more 
difficult and often more important than estimating 
present demand. The best basis of estimating the future 
demand for many 'articles is the trend of past sales. The 
records show whether the sales of an article are in- 

420 



Buying 421 

creasing or decreasing. Few, if any, goods are in steady 
demand over a long number of years. The difference 
between staples and fashion goods is that the demand for 
staples changes more slowly than the demand for 
fashion goods. The demand for hardware changes so 
slowly that past sales records alone may furnish a good 
index of future demand. On the other hand, the demand 
for women's hats often changes so rapidly that trends 
in past sales are only one of several factors to be con- 
sidered. 

A few illustrations will direct the reader's attention to 
the importance of changes in demand. What has hap- 
pened to the demand for rayon, seersucker suits, silk 
shirts, stiff collars, high shoes, short skirts, golf clubs f 
croquet sets, football equipment, lanterns, hammocks, 
iron pots and pans for the kitchen, talking machines, 
radios, harness, saddles, coal ranges, electric current* 
electrical refrigerators, tractors, lettuce, carrots, break- 
fast cereals, oranges, raisins, washing machines, and auto' 
mobiles? The demand for each of these articles has 
changed radically during the past 25 years and for many 
of them during the past 10 years. There is, however, a 
great difference in the rate at which the demand for 
various articles changes. With some articles there is a 
gradual increase or decrease over a period of years. With 
other articles the demand changes very rapidly during a 
few weeks or a few months. 

Although articles go out of fashion, the demand for 
them does not ordinarily stop entirely. A mail-order 
house still carries Congress gaiters. In some sections of 
the country the hardware stores do a good business in 
grain cradles. Percussion caps for muzzle-loading guns, 
croquet sets, and hammocks are still sold. The retailer 
and the local wholesaler must consider the demand in 



422 Buying 

his territory rather than the demand in the country 
at large. 

Ordering and buying. Ordering refers to the routine 
placing of orders for goods shown to be needed by the 
stock records. Buying includes the determination of 
what articles are to be bought ; the seeking out of sources 
of supply; the negotiating of prices and other terms of 
purchases; and the making of contracts under which 
orders are placed. Buying includes the purchase of goods 
with variable, demand, fashion goods, fads, equipment, 
and goods bought for special sales which cannot be 
ordered in a routine way from stock records. 

Fashions. A fashion is a style that is in vogue or that 
is enjoying wide popularity at a particular time. Mer- 
chandise which is greatly affected by changes in fashion 
is known as fashion (or style) merchandise. In buying 
fashion goods, the buyer must study the trends in fashion 
and forecast the future fashions. Fashion goods include 
not only wearing apparel but furniture and household 
furnishings, and, to some extent, foods, building mate- 
rials, electrical goods, books, automobiles, and sporting 
goods. It is often said that no goods are entirely free 
from fashion changes. 

In buying fashion goods, the buyer must study fashion 
trends and forecast future fashions. Fashion forecasting 
is difficult. Many goods go out of fashion and at some 
later time come back into public favor, but there does 
not seem to be a definite fashion cycle. An article may 
return to favor in 10 years, 25 years, 50 years, or per- 
haps never. 

Manufacturers of clothing produce many new designs, 
a few of which come into fashion. Stylists are often 
employed by manufacturers and large stores to aid in 
forecasting changes in the demand for fashion goods and 



Buying 423 

in designing artistic and useful products. Stylists and 
buyers watch the trends in fashion centers, such as Paris, 
Fifth Avenue, Palm Beach, and Hollywood. Many ar- 
ticles, however, may be worn in such places and yet 
never come into fashion throughout the country. All 
fashions do not originate in such centers. They often 
come from the people and may originate in any part of 
the country. The midget radio came from California, 
the mackinaw came from the lumber camps in the north 
woods, and the galosh, or gaiter, is said to have come 
into fashion among the co-eds in middle western uni- 
versities. 

Another method of securing information as to fashion 
trends is to make counts and compute the percentages 
of consumers who are using different types of goods. 
If a count shows that 25 per cent of the women passing 
a certain corner are wearing black dresses at one time, 
while a month later 40 per cent are wearing black dresses, 
it is evident that the trend of the fashion is towards 
black. If in the following month 50 per cent of the 
dresses at this corner are black, the fashion is still on 
the increase. If the next month shows only 42 per cent 
of the women wearing black, the fashion appears to have 
passed its climax, and the dealer should stop buying 
black dresses arid push the sale of those in stock. Future 
counts will show whether the trend away from black 
continues. Fashion counts show the goods in use, but 
articles continue in use after their sale has stopped. 
Frequent counts must therefore be made to find the 
trends. 

In order to buy fashion goods intelligently, the mer- 
chant may study his sales records and want slips care- 
fully, read fashion magazines, visit fashion centers, 
obtain reports from organizations which compile data 



424 Buying 

and make forecasts, observe local fashions, and make 
local fashion counts. 

Weather. The sale of many goods depends to a con- 
siderable extent upon the weather. A cold winter in- 
creases the sale of overcoats, gloves, ice skates, coal, and, 
if there is snow, sleds and snow shovels. A hot summer 
increases the sales of electric fans, garden hose, light 
weight suits, cold drinks, ice, refrigerators, and ice cream. 
A rainy summer increases the sale of lawn mowers and 
haying machinery, as there is more grass to be cut. The 
sale of lawn mowers is said to vary as much as 50 per 
cent from one year to another. 

The weather during the early part of the season affects 
the sale of many articles. If the early part of the winter 
is cold, the sale of overcoats, gloves, and many other cold 
weather goods will be increased. On the other hand, 
if the cold weather comes in February, people are think- 
ing of spring and are inclined to make their old coats 
and gloves finish the winter. Similarly an excessively 
hot June will increase the sale of fans, refrigerators, and 
palm beach suits more than a hot August. Recently 
the temperature in the central west went below zero 
just after Thanksgiving. A middle western glove manu- 
facturer reported that as a result his sales were so good 
he had to work overtime during the next six weeks to 
keep up with his orders. 

Weather cycles. The weather influences many busi- 
nesses. It would be very helpful if the weather could 
be forecast for 6 months or a year in advance. Attempts 
at long-range weather forecasting are common, but up 
to the present time no entirely accurate method has 
been devised. It has been observed that the weather 
ordinarily comes in "bunches." Three or four cold 
winters are likely to be followed by two or three mild 



Buying 425 

winters. Three wet and cold summers are often followed 
by two dry and hot summers. 1 Long-range weather fore- 
casting by the use of cycles is not entirely accurate, but 
it may be better than entirely ignoring future weather 
in making purchases. 

Business conditions. Sales are affected by economic 
or business conditions. When conditions are good, both 
business concerns and consumers buy freely. When busi- 
ness is poor, buyers curtail their purchases. Many 
workers lose their jobs and many have their earnings 
reduced. Others save money in fear that they will lose 
their positions. 

The buyer must therefore consider the future pros- 
perity of his territory in making purchases. Many vol- 
umes have been written on the subject of business 
forecasting, and it is too big a subject to discuss here. 
We shall only point out that what is generally called 
the business cycle is an average made up of conditions 
in all sections of the country and in all trades. One 
section of the country may have good business, while 
another section has poor business. One trade may have 
increasing sales, while another trade may have declining 
sales. 

The buyer must base his purchases on the expected 
sales in his trade in his territory. The general business 
cycle is thus only one of several factors which he must 
consider. The merchant in a steel town must consider 
the condition of the steel industry, as this influences the 
purchasing power of his customers. The merchant in 
a trading center in the Corn Belt is interested in the rain- 
fall in his community during July and August, because 

1 United States Chamber of Commerce study. This statement refers 
to the eastern portion of the Mississippi Valley. Farther west, the 
proportion of dry years may be larger. 



426 Buying 

the rainfall and the acreage planted largely determine 
the size of the local corn crop. The size of the local crop 
and the price affect the purchasing power of his cus- 
tomers. The price of corn depends upon the supply, 
and the supply, in turn, depends largely on the carry- 
over from the previous year and the July and August 
rainfall throughout the Corn Belt. 

The budget. A budget is a carefully worked out plan 
of the future sales, purchases, income, and expenses of 
an organization. The sales budget is the estimated sales 
for a future period. In a retail store the budget often 
covers a six-months period divided according to months. 
Future sales are estimated ou the basis of past sales, 
trends in sales, expected changes in demand, expendi- 
tures for advertising and sales promotion, and general 
business conditions and prosperity in the trade area. 
Sales are estimated by departments, lines, and classifi- 
cations of goods. For example, total sales of men's shirts 
may be estimated by months for a six-months period, 
and these estimates may then be broken down by sizes, 
prices, fabrics, styles, and colors. If designs, fabrics, and 
colors are considered in the budget estimate, the figures 
must be subject to change on short notice as changes 
occur in demand. 

When the sales budget is made, the buyer can set up 
his purchase budget, which serves as a guide to the quan- 
tities of the various articles to be bought. The budget 
should be flexible so that it can be changed quickly if 
changes in demand occur. The buyer should not, ordi- 
narily, buy the entire amount called for by the budget 
at the beginning of the period. He should reserve a part 
of his allowances for the various lines of goods, in order 
that he can buy new articles which come suddenly into 



Buying 427 

demand, or can increase his purchases of articles which 
sell faster than anticipated. 2 

Quality. A buyer should be a good judge of quality. 
Some goods have been so well standardized that they 
can be bought by grade or examined by trained in- 
spectors to see that they come up to the specifications. 
Some buyers determine the quality of goods needed and 
lay down specifications upon which the sellers submit 
prices. Many goods, however, are not standardized, and 
the buyer must judge their quality in order to purchase 
intelligently. Some buyers have spent years working 
in factories or wholesale houses handling the goods, in 
order to become good judges of quality. They develop 
highly trained senses of sight and touch. In recent years 
the laboratory has come to be widely used in determining 
the quality of various products. Chemists and other 
technically trained men find the chemical content, the 
strength, the resistance to wear and tear, and the dura- 
bility of various products. 

Buyers often secure records of performance on the 
goods offered for sale. If they have used the goods, they 
have their own records; if not, they may obtain reports 
from other users. Purchasing agents often exchange 
such information. With a motor truck, for example, 
the buyer wants to know the cost of operation per mile 
or per ton of goods carried. 

With goods bought for resale, the buyer wants to 
know how the goods sell and how much profit is realized 



2 In a department store the budget is originated by the buyers, who 
work with the division merchandise managers. Their figures then go 
to the controller and merchandise manager for revision. In a manu- 
facturing concern the sales budget may be drawn up by the sales and 
research departments and revised and approved by the chief executives. 
The purchasing department can base its budget on the sales budget. 



428 Buying 

on their sale. Occasionally, stores keep records of goods 
according to producers so that they know the net profit 
realized on the goods bought from various sellers. 

Prevailing prices. It is sometimes difficult to know 
the actual prices at which goods can be bought. In many 
trades prices are quoted in trade or business papers. 
Very often, however, goods can be bought for less than 
the quoted prices, and many sellers give different prices 
to different buyers. Brokers often give their principals 
(employers) information concerning prevailing prices. 
Buyers sometimes exchange prices quoted by various 
sellers. The buyer often obtains prices from several 
salesmen before placing an important order. In spite 
of such precautions, many purchases are made without 
the buyers knowing whether or not they have obtained 
the lowest prices available in the market. This is an 
advantage of belonging to a buying group (explained in 
Chapter 12). 

Future prices. If prices are expected to advance, buy- 
ers may buy enough goods to cover their needs for sev- 
eral months. On the other hand, if prices are expected 
to fall, purchases may be made on a hand-to-mouth 
basis. Contracts are often made to cover the purchase 
of goods months in advance of their delivery. In order 
to make such contracts wisely, the buyers must forecast 
the movement of prices in the future. If prices are ex- 
pected to fall, the buyer often prefers to buy the goods 
as needed unless the seller guarantees to give him the 
benefit of any reduction in prices occurring prior to de- 
livery. Buyers study price trends and attempt to make 
purchases at times when prices are low. 

Prices depend upon the supply of and demand for the 
goods and the quantity of money and credit available. 



Buying 429 

The supply of a product may depend upon the weather ; 
the acreage of crops planted; the stocks in the hands of 
producers, dealers, and consumers; the cost of produc- 
tion; and market prices. If the price is high, producers 
increase their output, while if the price is low, they cur- 
tail their operations. Demand depends upon population, 
the income of the consumers, fashions, the weather, 
business prosperity, living conditions, the price of the 
product under consideration, the prices of competitive 
or substitute products, advertising, sales promotion, and 
the like. Some manufacturing and merchandising com- 
panies have their own research departments to forecast 
the movement of prices. There are also several concerns 
that issue studies and forecasts of price movements for 
those who subscribe to their services. 

The work of the purchasing agent. The men who do 
the buying are usually called buyers in retail and whole- 
sale stores, and purchasing agents in factories, mines, 
public utilities, and institutions. The work of a pur- 
chasing agent differs in many respects from that of a 
buyer. In the first place, the purchasing agent usually 
has to buy a great variety of goods. He has to buy ev- 
erything from pencils and stationery to lubricating oils, 
fuel, gasoline, motor trucks, machinery, and raw ma- 
terials. Many purchasing departments buy thousands 
of articles. It is impossible for one man to study so 
many products and become an expert judge of their 
qualities and prices. Some of the large companies have 
several men in their purchasing departments, some of 
whom specialize on certain products and become ex- 
perts. 

The purchasing agent buys many things that are requi- 
sitioned by men in the organization. When he receives 



430 Buying 

a requisition for an article, he must find a source of sup- 
ply and buy at the best price available from a seller that 
offers the desired quality and service. In some instances 
the producer is specified on the requisition, so that all 
the purchasing agent does is to place the order. 

In some companies the purchasing agent's job is 
largely to buy the goods requisitioned by various de- 
partment heads. In such a plant the purchasing agent's 
duties are to seek out sources, negotiate terms, and place 
orders. He is, in reality, a high-grade clerk rather than 
an executive. 

In other plants the purchasing agent is a real execu- 
tive and selects many of the goods, determines the 
sources from which they can be bought to best advan- 
tage, determines the quantities to be purchased, and 
actually makes the contracts or places the orders. In 
such plants the purchasing agent may study business 
conditions and forecast prices. On important purchases 
he secures reports of the performance of goods offered 
by various sellers and has the goods analyzed in his 
laboratory or inspected by experts. He studies prices 
and price trends. He may forecast the company's sales. 
He determines the quantity of goods to be bought at a 
given time in accordance with his estimate of future 
prices and future sales. He is a real executive. 

Reciprocity. Reciprocity in buying means mutual 
trade interchange in other words, buying from certain 
sellers because they buy from us. Reciprocity is more 
important in business than is commonly appreciated by 
outsiders. It has been referred to as "the purchasing 
agent's nightmare," for the purchasing agent has to buy 
from concerns specified by the higher executives or by 
the sales department, regardless of whether these con- 
cerns have the best products or the lowest prices. 



Buying 431 

Chapter 25 
Review Questions 

1. What factors are necessary for success in buying? 

2. How can the buyer know present demand? 

3. How can the buyer estimate future demand? 

4. What is the difference between ordering and buying? 

5. What is fashion? 

6. What is meant by fashion forecasting? How is it done? 

7. What is a fashion count? How made? What is its use? 

8. What are the duties of a stylist? 

9. How does the weather affect demand? 

10. Should buyers study the weather and weather cycles? 

11. What is meant by the business cycle? 

12. How do business conditions affect buying? 

13. What is a budget? 

14. How should the purchase budget be made for a retail 
store? 

15. What is meant by saying that the budget should be 
flexible? 

16. How do buyers judge the quality of goods offered for 

sale? 

17. How may buyers secure information as to the actual 
prevailing prices? 

18. Why does a buyer need to know future prices? 

19. What factors determine prices? 

20. How can the buyer secure information as to future 
prices? 

21. How does the work of the "purchasing agent" differ 
from the work of "the buyer"? 

22. What is meant by reciprocity? Why has it been called 
"the purchasing agent's nightmare"? 



432 Buying 

Thought Problems 

1. How many items can you name that have been in 
steady demand for 50 years? For 25 years? For 10 years? 
Name products for which the demand has changed radically 
during the past five years. 

2. Why does the demand for various articles change? 

3. Why do fashions change? Who is responsible for the 
changes? 

4. Are changes in fashion desirable? It is said, on the one 
hand, that changes in fashion cause loss to the consumers 
because the consumers discard goods before they are worn 
out, and loss to the dealers through mark-downs on out-of- 
fashion goods. On the other hand, it is said that fashion 
changes are good for the manufacturers and dealers because 
they stimulate sales, and for the consumer because he tires 
of old products and derives pleasure (utility) from new 
things. 

5. What weight should be given to reciprocity in making 
purchases? 

6. How can one forecast future prices? 

7. Purchasing agents often resent being told by shop 
foremen, department heads, and high executives what brands 
or makes of products to buy. They claim that these people 
are too easily influenced by shrewd salesmen, friendships, or 
personal whims. Purchasing agents argue that they are 
trained to buy, to evaluate the arguments of salesmen, to 
calmly judge the qualities of products offered by various 
sellers, to secure reports from users of the products, and to 
have laboratory tests made. As a result, they claim to be 
better judges of the merits of the products offered by com- 
peting sellers than are the men in the shops or the offices. 

Evaluate this argument. 



CHAPTER 26 

Profits 

Meaning. Profit, or net income, as used in this chap- 
ter, is the difference between margin (including "other 
income") and the expenses incurred in the operation of 
the business. Differences in the meaning of "profit" 
arise because of differences in the expenditures that are 
included in expenses. The bookkeeper often includes in 
expenses only those things that are actually paid for in 
the operation of the business. The economist, on the 
other hand, says that expenses, or costs, should include 
all amounts that must be paid to business men to induce 
them to perform services. The economist includes all 
items included by the bookkeeper and, in addition, pay- 
ment for the owner's labor, capital, and risk. The econo- 
mist argues that depreciation of buildings and equipment, 
the salaries of the owners active in the business, and in- 
terest on the owners' capital invested in the business 
should be included in the expenses. It is evident that 
the profit will be much less when these items are in- 
cluded in expenses than when they are not included. 
We have to know what are included in expenses before 
we know the meaning of the "profit" shown on a con- 
cern's income statement. 

Economics teaches that under free competition prices 
tend to equal costs and profits disappear. Only the 
more efficient or the luckier (for example, persons own- 
ing goods which increase in value) make profits. Several 
studies of the operating statements of retail dealers show 

433 



434 Profits 

practically no profits for the typical store after the in- 
clusion of owner's salary, depreciation, and interest on 
the owner's capital as expenses. The reports of 168 
medium sized department stores in 1929 show average 
profits of only 0.1 per cent of sales. This illustrates 
the working of economic theory. It means that the 
owners (of the department stores) made little more than 
interest on their investment and salaries for their services 
after the payment of all other expenses. 

One trouble with putting owner's salaries in expenses 
is the difficulty of estimating their fair value. The sal- 
aries are fixed by the owners, who are not impartial 
judges of the value of their own services. Salaries may 
be placed too high ; this reduces the profit shown on the 
operating statements. In fact, some owners appear to 
prefer to take the earnings of the business out in salaries 
and then say that they are making very small "profits." 

Proper basis of profit. This raises the question of 
whether profits should be computed as a percentage of 
invested capital or as an income for each owner engaged 
in the business. In large corporations with many stock- 
holders, the most satisfactory method is to state the 
earnings as a percentage on the capital invested by the 
owners. In small businesses, however, it might be pref- 
erable to state the earnings as so much for each owner 
actively engaged in the operation of the business. Thus 
the merchant would say that he earned $3,000 rather 
than say that he earned 15 per cent on his investment. 
The commonly used method, however, is to state the 
profit as a percentage of investment or of sales. 

Variation in profits. We have pointed out in the pre- 
vious chapters that both margins and expenses vary 
between different dealers. As profit is the difference be- 
tween margin and expense, profits also vary. Expenses 



Profits 435 

vary more than margins because of differences in the ef- 
ficiency of competing merchants and because of differ- 
ences in luck circumstances beyond the control of 
individual merchants. 1 

Out of a group of retail dealers in a given year, 3 per 
cent lost money; 22 per cent earned less than 6 per cent 
on their investment; 33 per cent (one-third of the total) 
earned from 6 to 11 per cent on their investment; 20 
per cent earned from 12 to 17 per cent; 13 per cent 
earned from 18 to 23 per cent; and 9 per cent earned 
more than 23 per cent. Large profits are the cause of 
business success and make some rich. Small profits, on 
the other hand, cause dissatisfaction, while a lack of 
profit leads to failure. 

Object of business not profit. It is often said that the 
object of business is profit. We dislike this statement. 
Business provides the machinery through which most 
of our economic organization functions. The object of 
business is to perform services (or functions) for the 
consumers. The incentive which induces business men 
to undertake the performance of these services is profit. 
Profit is a reward for the efficient performance of these 
services. Unless a business man is efficient (or lucky), 
he does not receive a profit. 

Average profits. The average profits realized by 
groups of retail and wholesale stores, as shown by their 
operating statements, are usually from 1 to 6 per cent 
of sales and from 5 to 15 per cent of investment. 

The average earnings per man for each owner active 
in the business, in a large group of rural dealers han- 

1 To illustrate this variable factor of luck, a merchant secures a long- 
term lease on a store building and the town starts to boom, greatly 
increasing his sales and decreasing his percentage of cost for rent; or, 
a merchant's customers are visited by a drouth, which greatly in- 
creases his bad debt loss. 



436 Profits 

dling farm equipment in a good year, was found a few 
years ago by a government study to be slightly over 
$2,000 per year, after allowing 7 per cent on the invested 
capital. A similar figure for the owners of retail hard- 
ware stores, as found in a nation-wide survey made by 
The National Retail Hardware Association, was $1,679. 
Business success and failure. Success in business 
should perhaps be measured by how well a business man 
performs services for the consumers, but in practice it 
is measured by the financial rewards received. We may 
say that a man is successful in business if he earns some- 
thing more than a fair salary for himself and the or- 
dinary rate of interest on his capital. We may think of 
failure as a lack of success as just defined. It may r 
however, be better to divide business men into three 
groups: 

1. Successes. Those who earn fair salaries, in- 
terest on their capital, and something more as a 
profit. 

2. Middle group. Those who earn more than ex- 
penses but who have no profit over fair salaries and 
interest on their capital. Such men earn modest to 
fair salaries for themselves and low to average rates 
of interest on their capital. A very large proportion 
of business men come within this group. 

3. Failures. Those who lose money, or who earn 
less than fair salaries and no interest on their capi- 
tal. 2 A man may fail, as here defined, without 
becoming insolvent, as he may sell his business before 
all his capital is exhausted. He may remain in 
business for years by taking out very little for his 
personal services. 



2 Or who earn not more than the average rate of interest on their 
capital and nothing for their personal services. 



Profits 437 

It must not be assumed that a man stays permanently 
in one of the three groups. Many business men change 
from one group to another in different years. 

The mercantile agency defines business failure as the 
quitting of business with a loss to creditors in other 
words, as insolvency. This means that the concern go- 
ing out of business has lost all its own capital and some 
of the funds advanced by its creditors. Approximately 
one per cent of the business concerns of the country fail 
in this way during a year. However, more than one- 
sixth go out of business each year. 

Business mortality or turnover. Several studies have 
been made of business mortality, or the number of con- 
cerns quitting business. A few of the facts from such 
studies are summarized in the following paragraphs. 

Illinois study. A study of the dealers in 11 retail 
trades in 255 Illinois towns from 1925 to 1930 was made 
by the author. The facts are shown in Table 39. 

TABLE 39. PERCENTAGE OF DEALERS GOING OUT OF BUSI- 
NESS IN ONE AND FIVE YEARS IN 255 ILLINOIS TOWNS 

Per Cent Per Cent 

Type of Stores Quitting in Quitting in 

One Year Five Years 

Hardware stores 5.2 27.8 

Drug stores 7.0 24.3 

Dry goods stores 7.9 35.5 

Furniture stores 8.7 36.2 

Clothing stores 8.8 36.2 

Department stores 9.7 38.7 

Meat stores 14.1 46.3 

General stores 14.4 40.5 

Garages 17.2 51.0 

Grocery stores 17.5 49.5 

Restaurants 28.5 64.7 

Averages for 11 trades 15.9 46.3 

A study of all kinds of retail business establishments 
in two typical towns indicates that the averages of these 



438 Profits 

11 trades can be taken as representative of all retail 
businesses. 

These figures are based on the number of dealers who 
were in business in 1925 and who quit during the follow- 
ing five years. Those in business in 1925 include newly 
established dealers, as well as those who have been in 
business for a number of years. More dealers fail during 
their first year in business than during any later year. 
Many inefficient dealers enter business. They lack train- 
ing, knowledge, capital, or industry, and are soon forced 
out of business. The most grossly inefficient are pushed 
out during the first two years. Those who stay in busi- 
ness for two years have better chances of having long 
business careers than new dealers just entering business. 
The following figures show the percentages of all types 
of newly established retail business concerns, in two 
typical towns, which were out of business by the end of 
the first, second, and third years after starting: 

First Year... 31.4 por cent quit 

Second Year 47 4 " " " 

Third Year 58 7 " " " 

Other studies. Nystrom made a study of the business* 
life and mortality of retailers in 7 trades in various Wis- 
consin towns for periods between 1890 and 1912. His 
results were similar to those found in Illinois. The facts 
for Oshkosh are typical of his findings. There were 145 
dealers in these seven trades in Oshkosh, in 1890. Only 
18 of the original 145 were left in business in 1912. 
From 1890 to 1900, 201 dealers entered business. Only 
39 of these were still in business in 1912. 

System magazine conducted in three middle western 
cities studies covering the period from 1886 to 1916. In 
Grand Rapids, Michigan, it was found that more than 



Profits 439 

one-half of the dealers quit business within ten years, 
and more than two-thirds quit within 15 years. In Wa- 
terloo, Iowa, it was found that 45 per cent of the 
retailers went out of business within five years. In an- 
other city, it was found that 40 per cent of a group of 
retailers quit within five years. These studies included 
manufacturers and wholesalers. It was found that the 
rate of mortality was as high among manufacturers, and 
almost as high among wholesalers, as among retailers. 
Studies in Louisville and Fort Wayne show that the rate 
of mortality among retail grocers has changed little dur- 
ing the past forty years. 

The approximate percentages of retail stores going 
out of business annually in other cities have been found 
in various studies to be as follows: 

Percentage 

Type of Store { Quitting 

Per Year 

Drug: 

Chicago, 111 16 

Buffalo, N. Y 13 

Grocers: 

Buffalo, N. Y 36 

Louisville, Ky 25 

Fort Wayne, Ind 22 

Hardware: 
Buffalo, N. Y 16 

Shoe: 

Buffalo, N. Y 22 

A study of the figures presented in the foregoing para- 
graphs indicates that the rate of mortality is somewhat 
higher in large cities than in the smaller cities and 
towns. 

Why merchants quit business. Why do so many 
merchants go out of business each year? Some sell out 
with a profit or retire. Some quit because of old age r 



440 Profits 

sickness, and death. Some quit because of insolvency 
failure in the legal sense. But by far the most quit be- 
cause they are dissatisfied with their earnings. They are 
losing money or making so little that they decide to 
sell out and try other businesses or get jobs working for 
others. Nystrom found in his study that merchants who 
went out of business did so under the following condi- 
tions : 

PerCeni 
Sold out or retired with a profit ... 9.5 

Sold out at a loss 13.5 

Failures or fizzles 61.5 

Bankruptcies 3.0 

Sickness and death 12.5 

It will be noted that by far the largest percentage 
failed or fizzled that is, they quit business without 
making any profit for themselves. Most of them seem 
to have lost part or all of their capital. Thirteen and 
a half per cent were definitely known to have lost money, 
but only 3 per cent went through bankruptcy. Only 
9.5 per cent were definitely known to have quit with a 
profit, 

A very large portion of those going out of business 
later re-enter the same or another business. It is not 
unusual for a man to spend his life in business and to 
operate several different stores in the same or different 
trades. Some stores he may sell at a profit, but more 
often he sells at a loss or simply retains his original capi- 
tal. He may work for another until he accumulates a 
small amount of capital or may borrow enough to start 
another small business. Very often the wholesalers ex- 
tend sufficient credit to an experienced man to enable 
him to enter business with little or no capital of his 
own. Many men, however, have only one business en- 



Profits 441 

terprise of their own and, if it fails, are thereafter content 
to work for others. 

Why merchants fail. Many studies have been made 
to determine the cause of business failure. These studies 
show that failures are caused by incompetence, lack of 
capital, inability to meet competition, inexperience, un- 
wise extension of credit, poor collection of accounts, poor 
buying, slow stock turnover, poor location of stores, poor 
accounting methods, poor salesmanship, fraud, specula- 
tion, fires, floods, storms, robberies, sickness, and death. 

These causes may be grouped under three heads: in- 
efficiency; lack of capital; and external factors, such as 
fires, floods, storms, robberies, sickness, and death, which 
are beyond the control of the merchant. Broadly in- 
terpreted, inefficiency includes poor buying, slow stock 
turnover, choice of a poor location, lack of training, poor 
collections, poor salesmanship, poor accounting, and 
many other causes often listed separately. 

Inefficiency and lack of capital apparently cause about 
four-fifths of the business failures, while factors beyond 
the control of the individual business man cause about 
one-fifth of the failures. 



TABLE 40. CAUSES OF FAILURE OF 100 MEN'S 
FURNISHINGS STORES 

Cause of Failure Percentage of 

Concerns 

Lack of capital and over-expansion 33 

Incompetence 17 

Poor location , 13 

Declining community 13 

Speculation 7 

Inability to meet competition 5 

Fraud 4 

Too much stock (slow turnover) 4 

Lax extension of credit and poor collections 3 

Dissension between partners 1 



442 Profits 

There is popular idea that it is easy to make money in 
business. This leads many incompetent and inexperi- 
enced people to enter business without sufficient capital. 

TABLE 41. FACTS ABOUT FAILURES OF DRUG STORES 

(St. Louis) 

Cause of Failure Percentages 

Insufficient capital 40% of concerns 

No capital of own when business started .... 37 ' 

No previous experience in drug business 17 ' 

Gross incompetence 33 * 

Inadequate records 37 ' 

No profit and loss statement ever prepared . 93 ' 

Sickness (including old age) 10 ' 

Street construction obstructed entrance to 

store 7" " 

Depression caused decline in income of 

customers 3" " " 

Average rent paid by failing stores (4.7% 

for active stores) 10.5% of sales 

Average bad debt loss on credit sales (1.4% 

for active stores) 16.5 " " " 

TABLE 42. FACTS ABOUT FAILURES OF 570 BANKRUPT 
CONCERNS 

(Boston) 
Cause of Failure Percentages 

Less than high school education over 67.0% of bankrupts 

No previous experience in type of business . . over 50.0 " " " 

No accounting records over 50.0 " " " 

Inadequate accounting records 28.0 " " " 

Not using credit bureaus 99.1 " " " 

Bad debt losses on credit sales (average for 
active concerns 0.6%) 5.6% of sales 

TABLE 43. CAUSES OF BANKRUPTCY AMONG 
266 CONSUMERS 

Cause of Bankruptcy Percentage of 

Bankrupts 

Extravagance 28 

Evasion of judgment on foreclosed debts 15 

Avoidance of liability on foreclosed real estate . 14 

Decreased income 13 

Domestic misfortunes 13 

Speculation in stocks and/or real estate 7 

Business involvements 5 

Dishonesty 5 



Profits 443 

In one survey it was found that over half of the men 
entering the retail grocery business did so because they 
were out of work and had nothing else to do. Such peo- 
ple are generally unsuccessful and lose their time and all 
or part of their money. It is the withdrawal of these 
untrained, inexperienced, and incompetent people that 
causes the high rate of business mortality. This high 
rate of mortality is bad. It involves a loss of time and 
money to those who fail, and it involves bad debt losses 
to manufacturers and wholesalers which must be passed 
on to the consumers in the form of higher prices. 

The ease with which business can be entered often 
leads to an oversupply of dealers in many communities, 
causing poor services to the consumers through incom- 
plete or stale stocks and perhaps through high prices, 
since too many people are trying to make a living from 
a given volume of trade. 

Remedies. It is too easy to enter business. Four- 
fifths of the failures are caused by inefficiency and lack 
of capital. The situation might be greatly improved by 
more education for business and by keeping out of -busi- 
ness those who are obviously unfit and those who lack 
a minimum of capital for the business which they pro- 
pose to undertake. If this could be done, it would bene- 
fit the rejected applicants as well as the consumers in 
general. A movement is under way at this writing to 
increase greatly the amount of instruction offered in the 
high schools to prepare people for the distributive trades. 

Several proposals have been made for limiting the 
number of people entering business. One method that is 
gaining widespread popularity is city zoning. Zoning 
limits the districts in which new businesses can be started 
and so is said to reduce the- number of small neighbor- 
hood stores. Another method is to refuse licenses to new 



444 Profits 

dealers in communities that are already fully supplied 
with similar stores. Such plans usually limit the num- 
ber of stores in proportion to population. A city may 
take an inventory of its retail businesses and find the 
number of each type in each locality. Prospective mer- 
chants may then be advised by city officials or bankers 
which localities to enter and which not to enter. 

The wholesalers could do much to remedy the situa- 
tion by refusing credit to people who have insufficient 
capital and who obviously lack experience or the train- 
ing that fits them for success. 

Examinations. Another proposal is that people be 
required to pass examinations before they are given li- 
censes to enter business. Many states have examinations 
for men who want to be lawyers, doctors, accountants, 
barbers, plumbers, electricians, druggists, or underwrit- 
ers. Applicants could secure the information necessary 
for the examinations in schools and by experience. As 
licenses would be granted to all who passed the examina- 
tions, the proposal is not opposed to freedom of oppor- 
tunity, as at present understood. The examinations 
might cover the principles of merchandising (including 
salesmanship, advertising, and bookkeeping) and a 
knowledge of the goods to be handled. 

There is, of course, something to be said for allowing 
people without special training or who are not physically- 
able to do strenuous work to start small retail establish- 
ments, such as news stands, lunch counters, or small 
neighborhood stores, in order to keep them from being 
unemployed or becoming public charges. This is espe- 
cially true in times of business depression. However, 
considering all angles of the problem, it seems that only 
a limited number of persons should start such businesses 
of their own. 



Profits 445 

Chapter 26 
Review Questions 

1. What is profit? 

2. What is the difference between the bookkeeper's and 
the economist's definition of profit? 

3. According to the economist's definition, are there any 
profits under free competition? 

4. What objection is raised to putting salaries for the 
owners of the business into expenses? 

5. What are the two bases of computing profits? 

6. Why do profits vary widely between competing mer- 
chants? 

7. What is the object of business? 

8. How is business success measured? 

9. Give two definitions of business failure. 

10. What is meant by business mortality or turnover? 

11. What are the facts about business mortality as found 
in various studies? 

12. Has the rate of business mortality changed during the 
past 40 years? 

13. Is business mortality higher in large or small cities? 

14. Why do merchants quit business? 

15. What are the principal causes of business failure? 

16. Why do so many incompetent people enter business? 

17. Does the high rate of business mortality, or dealer 
turnover, benefit the consumers? Reasons? 

18. Name proposed remedies for the high rate of business 
mortality. 

19. Which of these remedies do you favor? Why? 

Thought Problems 

1. Do all the merchants quitting business fail? 

2. It has been said that a business man does not earn a 



446 Profits 

profit until he has allowed for depreciation on his assets, 
paid himself a salary, and earned six per cent on his invested 
capital. Comment. 

3. What do you think of the proposed examinations for 
new dealers? It has been said that such examinations are 
opposed to the idea of a free opportunity for all. What do 
you think of this statement? 

4. What should the proposed examinations for dealers 
include (assuming that they are to be required)? Make 
out a set of questions for prospective retail grocers or some 
other type of retailers. 

5. Why is the rate of mortality among new dealers highest 
during their first years in business? 



CHAPTER 27 
Principles of Salesmanship 

Salesmanship defined. Salesmanship may be defined 
as the art of persuading people to purchase goods or 
services. The buyers do not, in most instances, want 
the goods themselves but rather the satisfaction which 
the goods or services give. The salesman, thus, sells 
the hope and expectation of pleasure or profit. The 
customers are interested in what use they can make of 
the goods, or what the goods will do for them. To il- 
lustrate, the ordinary person is primarily interested in 
the pleasure and use he gets from an automobile. He 
cares more about its appearance, speed, riding ease, de- 
pendability, and safety than in the kind of steel, gears, 
axles, sparkplugs, springs, and bearings that are in it. 

Salesmanship is often thought of in a somewhat 
broader way. Thus "salesmanship is the art of winning 
willing cooperation." This definition broadens the 
meaning to include winning cooperation for every pur- 
pose. The clergyman, the teacher, the lawyer, the fore- 
man, the executive, and everyone else in a position of 
leadership should master the art of "salesmanship" in 
this broad sense. In this chapter, however, the term 
will be limited to inducing people to buy goods or serv- 
ices. 

Salesmanship is often used to include both personal 
and impersonal methods of selling. When defined thus 
it is divided into personal salesmanship, advertising, and 
publicity. As used in this and the three following chap- 



448 Principles of Salesmanship 

ters, "salesmanship" refers to personal salesmanship, 
Steps in a sale. There are four steps in making a sale. 
The first is securing attention. If the salesman cannot 
get the prospect's attention, he has no chance of arous- 
ing his desire. The second is , securing interest. The 
prospect must become interested in a product in order 
to learn enough about it to want it. The third step is 
arousing desire. People must want things before they 
will buy them. The fourth step is securing action. No 
matter how badly a person wants a thing, the sale is not 
made until he buys it. He may have the desire and yet 
not purchase because he wants something else more or 
because he lacks money. Not only must the salesman 
make people want things but he must make them want 
his product more than they want other things. 

Salesmanship vs. order-taking. Salesmanship is mak- 
ing people want a product and then selling it to them. 
Order-talking is simply handing out the goods or writing 
orders for goods which people already want. The clerk 
who fills the order, or the traveling man who asks the 
dealer what is on his want list and writes down these 
items on his order blank, is an order-taker. However, 
if he presents goods which the customer had not in- 
tended buying in such a way that the customer's desire 
is aroused and he buys them, then he is a salesman. The 
number of people who can take orders is very large. 
Consequently their pay is low. On the other hand, the 
number of people who can arouse desire and secure 
action is relatively small, and consequently their pay is 
very much higher than that of the order-takers. In 
practice, the term "salesmanship" is often used to in- 
clude both real salesmanship and order-taking. The 
reader, however, should remember the distinction. 



Principles of Salesmanship 449 

Necessity for salesmanship. Salesmanship is neces- 
sary under the present economic system because the 
productive capacity of our factories, mines, and farms 
is larger than the purchasing power of the consumers. 
This condition was brought about by the industrial revo- 
lution and has been particularly noticeable during the 
past fifty years. It makes what we call a "buyer's mar- 
ket," by which is meant that there are many sellers 
trying to sell every buyer. The buyers are therefore 
more or less autocrats who bestow their patronage upon 
the seller who best meets their needs. 

Salesmen have introduced many new products which 
add to the consumer's comfort and to business effi- 
ciency. Cooking stoves, electric refrigerators, kitchen 
cabinets, washing machines, electric irons, aluminum 
cooking utensils, vacuum cleaners, cash registers, type- 
writers, adding machines, and air-conditioning equip- 
ment are examples. The demand for nearly all new 
products must be developed. 

Types of salesmen. Salesmen may be classified as 
wholesale, retail, and specialty. Wholesale salesmen 
represent manufacturers or wholesalers and sell to other 
business men manufacturers, wholesalers, retailers, in- 
stitutions, public utilities and not to the ultimate con- 
sumers. Most of them are traveling salesmen and call 
upon their customers at their places of business. 

Retail salesmen sell at retail and usually work in re- 
tail stores where the customers visit them. 

The specialty salesman has only one line to sell, and 
he sells only one article or a very few products. He 
specializes on this, devotes his entire time to it, and so 
should have an expert knowledge of it. He often sells 
a new or distinctive product, or a product which en- 



450 Principles of Salesmanship 

counters much sales resistance. This means that his 
task is difficult and that it requires real ability and ef- 
fort to succeed. Many of the best salesmen are specialty 
men. They are found selling such products as insurance, 
books, bonds, machinery, and new devices of all kinds. 
Some call upon only business concerns and others call 
upon only the consumers, but many call upon all classes 
of prospects. They may represent any type of seller, 
but relatively few are employed by wholesale and retail 
merchants. 

The principles of salesmanship laid down in this chap- 
ter apply to all types of salesmen, but we shall have in 
mind particularly specialty and wholesale men. Retail 
salesmanship will be discussed more fully in Chapter 29. 

Buying motives. The salesman deals with people. 
Since his purpose is to influence people, he should un- 
derstand human nature. A knowledge of buying motives 
(the reasons why people make purchases) is fundamen- 
tal to successful salesmanship. 

Many lists of buying motives have been prepared. 
Some classifications include only the fundamental mo- 
tives, or bases, of human action, such as desire for food 
and bodily comfort, affection, pride, fear, imitation, awe 
of the Divine, desire for money, and desire to acquire 
things. Others include long lists of the specific reasons 
causing people to make purchases. For our purposes 
we shall list the above fundamental motives with a few 
of their more important subdivisions. 

BUYING MOTIVES 

Desire for food. 

Desire for bodily comfort, health, protection from the 

weather as given by houses and clothing, leisure, 

and cleanliness. 



Principles of Salesmanship 451 

Affection love of the opposite sex, of family, of 
friends; and the desire to make them happy. 

Pride, desire for the praise and admiration of others, 
desire to excel, desire for ornaments, education, 
etc. 

Profit or desire for gain or economy. Most pur- 
chases made by business men are made in the hope 
of a profit. 

Fear, caution, desire for safety. 

Imitation, desire to be like others and have what 
they have to be in fashion. 

Worship ; love, and awe of the Divine. 

Constructiveness, desire to make things. 

Curiosity, desire for knowledge, education, travel. 

Desire for justice and fair play. 

Amusement, desire for entertainment and recreation. 

Acquisitiveness desire to own things. 

The salesman must appeal to these motives in making 
sales. Some of them are more important than others. 
Their importance varies with different buyers. The 
salesman must study his prospects and select the motives 
that are best adapted to each of them. One man is very 
fond of his children and can be reached best through an 
appeal to his affections. Another is vain. The salesman 
may appeal to his pride. Another likes money and can 
be successfully reached by being shown how he can make 
a profit. 

The sale analyzed. The steps in making a sale are: 

The preapproach. 

Securing the interview. 

The approach, securing attention. 

The sales talk, securing interest, desire, and action. 

The departure. 

The oreaDDroach. The Dreannroach is the work that 



452 Principles of Salesmanship 

should adapt his talk to the needs and characteristics 
of the prospects. He cannot ordinarily learn enough 
about the buyer's needs and personality during the in- 
terview. He should, therefore, learn something about 
the buyer and his needs, and should plan his sales talk 
before he makes a call. 

A life insurance salesman should find out something 
about his prospect's income, age, family, and property 
before he calls. He can then present a definite plan of 
protection and saving to meet his prospect's needs. Sup- 
pose he finds a prospect with a good income, limited in- 
vestments, and a wife and young children. He can then 
suggest a plan which will provide an adequate income 
for the wife during her lifetime and for the children un- 
til they are grown and educated. If a prospect has young 
children, the salesman selling such products as books, 
musical instruments, or automobiles can appeal to the 
man's affection by showing how his product will benefit 
the children. If a prospect is found who likes praise and 
admiration, the salesman shows how his product will 
secure the praise of the prospect's friends. If the sales- 
man discovers that a prospect is very ambitious to make 
oioney, he can appeal to his desire for gain. 

There are many sources of information open to the 
salesman. He may consult directories to find a pros- 
pect's occupation or business, financial rating, and resi- 
dence. Credit bureaus will often furnish information as 
to character, employment, occupation, and present and 
former addresses. Information may be obtained from 
hotel clerks, other salesmen, other business men, banks, 
news in local papers, advertisements of the prospect, and 
the employees, neighbors, or friends of the prospect. 
Time and tact may be required to gather the informa- 
tion, and it is generally better to spend a reasonable 



Principles of Salesmanship 453 

amount of time in securing information about one's 
prospects than to make "cold" calls. 

Securing interviews. The salesman cannot arouse the 
buyer's desire unless he has an opportunity to talk to 
him. No matter how much he knows about his product 
or about the buyer's needs and characteristics, he cannot 
make sales without interviews. A great many interviews 
are obtained easily. Some buyers, however, may not 
want the salesman's goods; if they did, salesmen would 
be unnecessary, and order-takers could do the work. 
Or, the buyers may be busy and not have time to see 
all the salesmen who call upon them. 

If the salesman has made a proper preapproach, he 
knows whom he wants to see, and he can thus ask for 
his prospect by name. This increases his chances of se- 
curing an interview. A good appearance creates a good 
impression and helps secure the interview. The sales- 
man should act as if his business were important, 
and he should ask for the interview confidently, as if it 
were expected. If the buyer is busy, the salesman should 
offer to wait or to call again at a later time. Perse- 
verance wins many interviews. Friendly relations with 
secretaries and employees in the outside office are very 
helpful, for they can often make appointments and give 
information as to the best time to call and the mood of 
the prospect. The salesman may write on his card that 
he has seen or sold certain acquaintances of the buyer. 
If he has sold their competitors, they are very likely to 
see him. The salesman may at times secure the buyer's 
interest by sending in a sample of his product by the 
office boy. Often the buyer's interest is aroused by let- 
ters or advertisements sent to him in advance of the 
talesman's call. 

Thp sfl.lpsmfln rrmv rrmkp advano.p RrmointmpntK hv 



454 Principles of Salesmanship 

telephone or letter. At times he secures an introductory 
letter from a friend or has a mutual friend make an ap- 
pointment. In extreme cases the salesman may walk 
into the buyer's office unannounced or may secure en- 
trance by strategy. When entrance is secured in such 
ways, the salesman is at a disadvantage, but he may feel 
sure that he has something that will interest the buyer. 
The salesman for a patented device may follow the of- 
fice boy into the buyer's private office and place the 
product on his desk. As the product is new, the buyer 
knows nothing about it and is not interested until he 
sees it; but then he is frequently interested, and many 
sales can be expected if the product meets a genuine 
need. 

The approach. The purpose of the approach is to 
secure the buyer's attention. The salesman should have 
a good appearance, for the buyer often judges him by 
his first impression. If possible the salesman should 
approach the buyer when he is in a receptive mood. 

There are several methods of approach. The sales- 
man using the direct method gives the name of the com- 
pany, usually his own name, and then starts in to 
explain his product. 

Sometimes the salesman tries to secure attention by 
curiosity. For example, he may say that he has a plan 
whereby the buyer may secure financial independence 
for his old age. This naturally arouses the curiosity of 
the buyer and secures his attention. 

Enthusiasm may be used to secure attention. If the 
salesman is enthusiastic about the product, the buyer 
is inclined to think that it is worth looking at. 

A demonstration often makes an excellent approach, 
for it shows the buyer what the salesman is talking 



Principles of Salesmanship 455 

about. We learn much more quickly through the eye 
than through the ear. The salesman mentioned above 
who placed his product on the buyer's desk and began 
to explain its operation used the demonstration method. 
Salesmen can often place a sample in front of the buyer 
before they begin to talk. The salesman for a check 
writer may set his machine down and turn out a speci- 
men check before he begins his talk. Sometimes the 
demonstration approach is dramatic; thus a glassware 
salesman may roll a sample along the floor as he enters 
to show that it is not easily broken. 

The hobby approach. The hobby approach consists in 
starting to talk about the buyer's hobby. The salesman 
sees a large framed trout in the buyer's office and asks 
about where the fish was caught. This starts a conver- 
sation about fishing and may establish friendly relations 
between the buyer and the salesman. A salesman no- 
ticed in the paper that the son of a prospect had won a 
very difficult sail boat race. Knowing something about 
boating, the salesman started the conversation by com- 
plimenting the prospect on the success of his son. The 
father was very proud of his son and a very interesting 
conversation ensued, and the salesman got the buyer in 
a very favorable attitude before he began his sales talk. 

The hobby approach -can be used successfully, but it 
must be well done to be effective. The salesman must 
know enough to talk about the hobby intelligently, and 
the buyer must have time for the conversation. The 
salesman who must tell his story in a few minutes can- 
not talk about hobbies. Buyers are often too busy to 
talk hobbies during business hours. Suppose a buyer 
is interested in baseball and twenty salesmen call upon 
him daily. If each salesman tries to talk baseball, the 



456 Principles of Salesmanship 

subject gets very tiresome. The buyer's reaction is un- 
favorable, and the salesman who uses this method in a 
casual way lessens his chances of making a sale. 

Securing undivided attention. The buyer will often 
admit the salesman and continue with other work, ex- 
pecting to divide his time between two things. The 
salesman should not begin his talk under such circum- 
stances. If a demonstration cannot be used to secure 
full attention, the salesman should wait. Often it is 
a question of perseverance as to which will wait the 
longer, the buyer or the salesman. To force the issue 
the salesman may offer to return at another time when 
the buyer is less busy. 

Chapter 27 
Review Questions 

1. What is salesmanship? 

2. What steps are involved in making a sale? 

3. What is the difference between salesmanship and order- 
taking? 

4. Is salesmanship necessary? Why, or why not? 

5. What are the different types of salesmen? 

6. Name the important buying motives. 

7. What use should the salesman make of buying motives? 

8. What are the different steps in making a sale? 

9. What is meant by the preapproach? What can you 
say of its importance? 

10. What sources of information can a salesman use in 
securing advance information about his prospects? 

11. How may the salesman secure difficult interviews? 

12. What is meant by the approach? What is its purpose? 

13. What is meant by a demonstration approach? 



Principles of Salesmanship 457 

14. What is meant by a hobby approach? What do you 
think of this type of approach? 

15. What should the salesman do when the buyer tells 
him to go ahead with his sales talk while he goes ahead 
with other matters? 

Thought Problems 

1. How many people do you know who have everything 
they want that can be purchased with money? Does the 
answer to this question throw any light on the need for 
salesmanship? 

2. Give as many meanings as you can of "salesmanship." 

3. How may a life insurance salesman find out about a 
prospect's income, age, family, and amount of insurance be- 
fore he calls upon him? 



CHAPTER 28 

The Sales Talk 

As soon as the salesman has secured the buyer's at- 
tention, he starts in to explain his product to deliver 
his sales talk. In order to make a sale, he must get the 
buyer interested, arouse his desire for the product, and 
induce the buyer to make a purchase. 

Securing interest. The buyer is primarily interested 
in himself, his business, and his family. The salesman 
should talk from the buyer's viewpoint. .He should 
show what his product will do for the buyer. He should 
place more emphasis on the use of his product by the 
prospect than on the product itself. This is known as 
the "you" attitude. This attitude is a fundamental of 
good salesmanship. 

Questions are often an effective way of securing inter- 
est. The salesman asks, "How much does your coal 
cost?" This concentrates the buyer's mind on the sub- 
ject of fuel and very likely arouses his curiosity to know 
whether the salesman has a plan for reducing this cost. 

The salesman should appeal to the buying motives 
that he feels are best adapted to his prospect and his 
product. To do this he must know something about his 
prospect, or must "size him up" during the interview. 
Many buyers can be reached through an appeal to profit 
the main appeal in the sale of goods to business con- 
cerns. The salesman should tell how his product will 
increase the buyer's sales or will add to his profit. If 
the salesman has a machine that saves labor, he points 

458 



The Sales Talk 459 

out the saving. If the machine is strongly built, he 
points out its durability and the small cost for repairs. 
He shows how it is real economy to buy a superior prod- 
uct. 

Affection is a strong motive with most buyers and can 
be utilized by salesmen selling products to be used by 
the buyer's family. The washing machine salesman 
tells how the product will save the wife much hard toil. 
The radio salesman tells how much enjoyment the family 
will secure from the radio. 

Many buyers can be reached through pride. The 
salesman for an expensive automobile points out how 
much pleasure is obtained from owning and riding in 
such a fine car. "And besides, the depreciation and re- 
pairs are so much less on a really good car than on a 
cheap car." Thus the salesman brings in economy and 
makes two appeals. 

Arousing desire. The salesman wants to develop in- 
terest into desire. The change often takes place so 
gradually that neither the buyer nor the salesman know 
exactly when it occurs. The salesman should appeal to 
as many motives as possible. He needs to know his 
product and its uses thoroughly so that he can fully 
explain it to the prospect. He must arouse confidence 
in his product; this may be done by demonstrations, by 
showing testimonials, by giving the names and experi- 
ences of satisfied users, or by telling about the quality of 
raw materials and workmanship employed in its pro- 
duction. To establish confidence in his firm, he can tell 
about its age, size, and reliability. Enthusiasm and sin- 
cerity will do much to gain confidence. 

Demonstrations should be used whenever possible. 
The salesman must appeal to as many of our senses as 
nossihlp. When he talks, hp onlv HSPS thp SPTISP of 



460 The Sales Talk 

ing. If he can show his product, he uses the sense of 
sight, and most people learn much more quickly by sight 
than by hearing. If he puts the product in the buyer's 
hands, or gets him to try it on, he appeals to the sense 
of touch ; and in the sale of foods he can appeal to the 
sense of taste. The sense of smell can be used less than 
the other four senses, but it may be used in the sale of 
such goods as perfumes, soaps, flowers, and foods. 

The salesman should be very careful not to make 
negative suggestions or to ask questions suggesting nega- 
tive answers. Positive suggestions and questions should 
be used. For instance, "Isn't that pretty ?" "Doesn't 
that fit in with your present equipment?" 

Meeting objections. The buyer often has objections 
which must be answered before he will buy. The sales- 
man should anticipate as many of these objections as 
possible in his sales talk. To illustrate, if a salesman 
is selling an automatic water heater, he can point out 
during his sales talk that its greater convenience more 
than compensates for the little extra cost of its opera- 
tion. If a common objection to his product is its high 
price, he should give such a convincing talk on its quality 
and advantages that the buyer will think it well worth 
its price. 

The salesman should be able to answer the objections 
raised by the prospects. If the prospects say that they 
cannot afford the product, the salesman may reply that 
they cannot afford to do without it and proceed to show 
the savings or the extra profit derived from its use. He 
may say that the article can be bought on credit with 
easy payments. If the prospect means that he cannot 
afford it because he prefers to spend his money for other 
things, the salesman tries to show that, after all, more 
satisfaction is obtained from his product. For example, 



The Sales Talk 461 

the prospect objects to the price of a high quality mat- 
tress. The salesman replies that the average person 
spends one-third of his life in bed. "When such a large 
part of your time is spent in bed, shouldn't you have the 
most comfortable mattress?" 

If an objection is made to the quality or design of the 
product, the salesman should admit any defects but 
show the superiorities of his product. If the prospect 
objects to a washing machine because there is no apron 
to guard the motor, the salesman admits the lack of an 
apron but points out that the apron was left off to 
lighten the machine and make it easier for the woman 
to move. He goes on to say that the guard is little or no 
protection. Thousands of tests have shown that the 
motor is absolutely safe. Besides if the motor should 
short circuit, a metal apron would afford no protection. 

If the dealer says that business is bad, the salesman 
points out that the dealer cannot expect to keep up his 
sales with incomplete stocks. This objection often re- 
flects the pessimism of the buyer. The salesman may 
try to dispel this by naming other customers whose 
business is good. If the dealer says that he is all stocked 
up, the salesman may ask permission to examine the 
shelves to see if the stock of some sizes, styles, or grades 
is low. If so, the salesman points out what additional 
stock is needed. If the dealer's line is complete, the 
salesman may say that the dealer can add an additional 
line, or that his product sells faster or carries better profit 
than those now handled. He may ask for a trial order. 
If these requests are denied, the salesman may try for 
an order for future delivery, or try to establish friendly 
relations as a basis for future sales. The salesman 
should be careful not to oversell the dealer. The ad- 
vantages of a rapid rate of turnover have been previ- 



462 The Sales Talk 

ously explained. If the salesman sells the dealer goods 
which do not move, he is injuring the dealer and creat- 
ing ill will for his company and himself. On the other 
hand, a dealer with a small stock of an article will not 
push its sale as much as he will when he has a large 
stock. 

The salesman should study all of the objections which 
he meets and secure answers to all that can be answered. 
No product is perfect, and where valid objections exist 
the salesman should frankly admit them but also tell 
of the compensating advantages. 

Action. The close is ordinarily considered the most 
difficult part of salesmanship. The proper time, or the 
psychological moment, to close is when the prospect is 
ready to buy. The salesman can lead up to the close 
and, if the prospect is not convinced, continue with his 
talk, giving additional information, covering new points, 
answering objections, and reassuring the buyer. The 
salesman should assume that the prospect is going to buy 
and should act on this assumption. He should not sug- 
gest by any word or action that the buyer is not going 
to make a purchase. 

Close on a minor point. The salesman may shift the 
decision to a minor point. The clothing salesman, when 
he feels that the customer has almost reached a decision, 
starts to take his measurement. He asks if the coat 
sleeve is the proper length. He thus takes it for granted 
that the customer is going to buy the suit. The cus- 
tomer has his mind shifted from the question of whether 
or not to buy to the question of the proper length of the 
sleeve. Thousands of suits have been bought on the 
length of the sleeve or the fit of the coat. If the sales- 
man has different colors, styles, or finishes of his product, 
he may shift the decision to such matters. 



The Sales Talk 463 

The specialty salesman often says: "I have two de- 
liveries, one on the 15th of April and the other on the 
2nd of May. Which time would be more convenient for 
you?" The buyer is undecided about making the pur- 
chase and is trying hard to make a decision. The 
salesman shifts her decision to another matter. She 
probably replies: "If I am going to have it, I want it as 
soon as I can get it." Or, "You had better bring it in 
May; we shall be more likely to have the money then." 

The signed order. If a signed order is required, the 
salesman should proceed to fill it out as a matter of 
course. He should not suggest by any word or action 
that there is anything unusual about signing an order. 
He should act as if it were merely a part of the day's 
business and were done by all buyers in the regular course 
of business. When the order is filled out, the salesman 
should place it before the buyer and hand him the pen. 
Very often no word is needed. Often it is well to call 
the buyer's attention to the fact that certain terms, de- 
livery dates, prices or discounts are written as agreed. 
If the buyer objects to signing the order, the salesman 
may ask him to read it and explain that a written order 
protects both parties. He may also explain that it is 
the regular thing. Some salesmen say that it is only 
a required formality and means nothing. This is often 
untrue. If it means nothing, why is it required? 

The departure. After the sale is closed, the salesman 
should leave quickly and gracefully. The buyer has 
given the order and has other matters to attend to. The 
salesman should not take up any more of his time. The 
salesman should pack his samples or catalogs quickly 
and deftly. If the buyer is watching, he should make 
some friendly remark about the weather, a current news 
item, or a topic of previous conversation. He may also 



464 The Sales Talk 

make a reassuring statement about the goods, as "I 
know you are going to enjoy your purchase." The main 
thing, however, is to get away quickly without appearing 
to be in a hurry. 

Types of buyers. There are many kinds of buyers. 
Nevertheless certain general types may be recognized. 
Some of the more important types, with suggestions of 
how they should be handled, are given below. 

The cold, critical buyer. The salesman should 
keep his "nerve," or self-confidence, and give a very 
business-like sales talk full of facts. He should be 
careful not to talk too much, not to make broad and 
sweeping statements, and not to overstate the merits 
of the product. 

The self-important buyer or egoist. The salesman 
should flatter this type. 

The easygoing and good-natured buyer. The 
salesman should establish friendly relations. The 
salesman likes to meet this type but should not expect 
sales to come too easily. Sales are often lost because 
the salesman thinks the sale is assured and so does 
not put forth his best effort. Some buyers adopt this 
attitude to throw the salesman off his guard. 

The nervous and irritable buyer. The salesman 
should be calm and polite. 

The forgetful buyer, or the type that has difficulty 
in concentrating and reaching decisions. The sales- 
man must go slowly and repeat often. He should 
help the buyer to decide and should narrow the 
choice as rapidly as practicable to make the buyer's 
decision easier. Salesman must arouse confidence. 
This may be done by testimonials or by naming 
users, as such buyers may imitate people in whom 
they have confidence. 

The opinionated buyer who has strong opinions on 
politics, religiop, business conditions, economic re- 
form, etc. Such people are likely to be very talka- 
tive. The salesman should keep on the subject and 



The Sales Talk 465 

direct the buyer's mind to his product. The salesman 
should not disagree, but this does not mean that the 
salesman should lie by saying that he agrees when 
this is not the case. If the salesman has time, he 
may win their friendship by being a "good listener." 
The impolite buyer. The impolite buyer may 
belong to almost any of the above groups except the 
easygoing, good-natured group. Under the present 
economic condition which produces a buyer's market, 
the buyers can be most unreasonable and disagree- 
able. The salesman should ordinarily keep his 
temper and politeness, no matter how impolite the 
buyer becomes. If the buyer goes so far as to lose 
his temper, this gives the salesman the advantage. 1 
Cultivated and rough buyers. Many sellers recog- 
nize two types of customers and employ different 
types of men to reach each class. The salesman sell- 
ing the educated or cultivated buyers must be better 
dressed, have better manners, and use better language 
than the salesmen selling to the "rough-neck" class. 
Constructing the sales talk. Many companies con- 
struct sales talks for the use of their men. These are 
helpful, although sometimes the salesmen must change 
them somewhat to suit their personalities and sales 
methods. If the company does not provide sales talks, 
the salesmen should develop one or more to suit their 
needs. Some companies recommend the use of memo- 
rized sales talks by their salesmen. Such talks are better 
than no organized talks. The memorized talk, however, 
is dangerous in that it is not adapted to all prospects 
and is likely to become mechanical or parrot-like. 

The sales talk should be flexible, so that it can be 
adapted to different buyers and to different situations. 
It is often well to have several talks to suit different situ- 



1 In very extreme cases, where the buyer is a bully, the salesman 
may win his respect and business by "calling his bluff" and showing his 
resentment emphatically. 



466 The Sales Talk 

ations. Thus the life insurance salesman may have talks 
for young unmarried men, for young married men, for 
men with children, for middle aged men who are begin- 
ning to think of old age and retirement, for business 
and professional women, for students, and so on. The 
wholesale salesman may have talks for rural dealers who 
are losing business to the trading centers, and for dealers 
in the large cities who are faced with competition from 
the chain and department stores. 

The sales talk should be based on the needs of the 
buyers, on human nature, and on a thorough knowledge 
of the product. A habit talk is usually better than a 
memorized talk. A habit talk is one that is carefully 
worked out and is given in approximately the same way 
every time, but is not memorized and repeated word for 
word. The talk should be conversational in nature and 
should be suited to the individuality of the salesman. 
One salesman may use a method successfully, while an- 
other would fail if he used it. For example, one man 
may be able to establish friendly relations very quickly 
and to be very frank and confidential in his conversa- 
tion with his prospects. Another salesman, who perhaps 
is dignified and arouses confidence by his dignity and 
self-assurance, might arouse the resentment of his pros- 
pects by using the first salesman's method. A third 
man may make sales because of his thorough knowledge 
and love of his products. The same basic talk may be 
used by these three men, but each should adapt the talk 
to his method of selling. One method of securing good 
sales talks is to have the best men in the organization 
give their talks. These are written down, revised, and 
modified, and given to the other men. 

Value of sales talks. It has been proved that trained 
salesmen produce much better results than untrained 



The Sales Talk 467 

men. Sales training usually includes a careful study of 
one or more sales talks. An insurance company pre- 
pares sales talks for its salesmen, but these talks are not 
required. Some of the men use them and some do not. 
During a recent year, the new men who used the pre- 
pared sales talks sold an average of 66 per cent more 
insurance than the new men who did not use the pre- 
pared talks. During their second year, the men who used 
the sales talks sold on the average of 114 per cent more 
insurance than the men who did not use the sales talks. 

Chapter 28 

Review Questions 

1. How may the salesman secure interest? 

2. How may the salesman arouse desire? 

3. What are meant by objections? 

4. Name some typical objections, with your answers to 
them. 

5. What is meant by the close? How should the sales- 
man go about closing a sale? 

6. What is meant by a close on a minor point? 

7. How should the salesman make his departure? 

8. How should the salesmen proceed with the close when 
a signed order is required? 

9. Name seven types of buyers. 

10. How should each type be handled? 

11. What is meant by a sales talk? 

12. What do you think of a memorized sales talk? 

13. How does a habit talk differ from a memorized talk? 

14. What is meant by a flexible sales talk? 

15. How should the sales talk be adapted to different 
types of buyers? 



468 The Sales Talk 

Thought Problems 

1. Select some article or service and prepare a sales talk 
to be used in selling it. 

2. How many types of buyers can you name in addition 
to those listed in this chapter? 

3. Some sales executives say that most of the so-called 
"objections" are not objections at all but only excuses used 
because the prospect doesn't really want the product or 
because he doesn't want to tell his real objection. Do you 
agree with this point of view? If so, how can the salesman 
find the real objection? 



CHAPTER 29 

Retail Salesmanship 

Problems in retail selling. The same principles apply 
to retail salesmanship as to other kinds of salesmanship. 
The buyer must have her attention centered on the 
goods, must become interested in them, must have her 
desire aroused to own them, and must reach a decision 
and make the purchase. There is, however, one impor- 
tant difference between retail selling done in the stores 
and other forms of selling. This is the fact that the 
buyers come to the salesman. The customers may be 
attracted to the store by the display of goods in the 
window, by the store's advertisements, by satisfactory 
relations in the past, by friendly relations with the sales- 
people, or by the convenient location of the store. 

The fact that the customers come into the store volun- 
tarily makes the work of the retail salesperson different 
in some important respects from that of the traveling 
salesman. The prospect usually enters the store because 
she is interested in certain merchandise. The sales- 
person therefore has no problem in securing an interview, 
in attracting attention, or in arousing interest. He 
must concentrate on arousing desire and closing the sale. 

In many cases the customer knows exactly what she 
wants before she enters the store. All the salesman has 
to do is to find and wrap the goods and make change, 
or fill out a sales ticket. In such cases he is an order- 
taker. In making such sales, most of his work consists 
of handling the goods themselves, making out sales slips, 

469 



470 Retail Salesmanship 

or making change. This is not "selling," except in a 
legal sense. This explains why retail salespeople are 
sometimes called clerks. There is, however, an oppor- 
tunity for real salesmanship in retail stores. 

The preapproach. The retail salesman does not ordi- 
narily make a preapproach before trying to sell a pros- 
pect, for he does not ordinarily know t in advance who is 
coming into the store. Hence it is very important that 
he size up the new customers on meeting them. The 
retail salesman, however, should know his regular cus- 
tomers, should remember their names and faces, and call 
them by name. He should know their needs, tastes, de- 
sires, approximate income, and the sizes of their families 
or their family relations. It makes a very favorable 
impression on his customers if he remembers the kind, 
style, or color of goods they like. Does the customer 
want loud or conservative patterns and what are her 
favorite colors? The retailer of clothing, for example, 
may keep a card record of the sizes, patterns, colors, and 
styles preferred by each customer. The salesman can 
look at the file and avoid having to ask for sizes and can 
usually show at once the proper kind of goods. 

Some customers want to be flattered. Some are in- 
dependent, and others want advice and help in making 
selections. Some want the very highest quality, while 
others are bargain hunters and want to be told how 
much money they are saving on their purchases. The 
salesman should remember the personal likes and dis- 
likes of his customers. For example, the meat sales- 
man may remember that Mrs. Jones wants the very 
best steak and likes it cut 1*4 inches thick, while Mrs. 
Smith wants a medium quality and likes it cut thin. 
The salesman who remembers such things pleases his 
customers, gives them better service, and sells them 



Retail Salesmanship 471 

more quickly than the salesman who does not have this 
information. 

The approach. The salesman should approach the 
customer as soon as she enters his store or department, 
or as soon as he is free. He should go to meet the cus- 
tomer. This shows interest. A frequent criticism of 
retail salespeople is that they are not interested in the 
customers. Too often they are talking to each other, 
or are loafing, and are too lazy or indifferent to approach 
the customer promptly. 

The salesman should greet the customer pleasantly. 
It does not make so much difference what he says as 
how he says it. The salesman may say, "Good morn- 
ing/' "May I help you?", or "May I be of service?" If 
he recognizes the customer, he may say, "Good afternoon, 
Mrs. Smith, may I help you?" Or he may say, "Good 
morning, Mr. Jones," and wait in a manner that indi- 
cates that he is at Mr. Jones' service. Sometimes the 
salesman creates a favorable impression without saying 
a word. He approaches the customer and by his pleas- 
ant expression and his actions announces that he is ready 
and glad to serve her. 

If the customer is "just looking around," the salesman 
should ordinarily remain in the background far enough 
away to leave the customer entirely free but near enough 
to be ready to answer questions or find goods as soon 
as she indicates by actions or words that she wants help. 

The size-up. The size-up is very important. Differ- 
ent types of customers should be handled differently. 
If the salespeople could only know what was in the 
minds of their customers, they could sell more goods and 
avoid much criticism. If the salesman knew, for ex- 
ample, that the customer was feeling pretty prosperous 
and wanted the best, he would not start out by showing 



472 Retail Salesmanship 

cheap goods. On the other hand, if he knew the cus- 
tomer was feeling very poor and wanted to exercise the 
strictest economy, he would not try to talk her into buy- 
ing high-priced goods. 

The same customer enters the same store in different 
moods. At one time she is in a big hurry. She wants 
a certain article and wants to get it as quickly as pos- 
sible. At another time she does not have a definite ar- 
ticle in mind and wants to be shown different articles. 
Again, she may be just looking around in the hope of 
finding something for a gift. She needs to be handled 
differently on each occasion. 

In order to size up the prospect, the salesman should 
observe her facial expression and how this expression 
changes with the presentation of different merchandise 
and with different suggestions. The salesman should 
observe the prospect's entrance. Does she seem to be 
in a hurry or does she enter leisurely? Is her step un- 
decided? By observing the prospect's step, facial ex- 
pression, bearing, voice, and dress, he may be able to 
sell her more satisfactorily and more quickly. 

The interview. The saleman's first problem is to find 
the customer's interest. If she does not give this infor- 
mation, the salesman may ask questions. If the article 
is carried in a number of sizes, grades, brands, colors, 
or styles, the salesman may ask questions to find more 
exactly what the customer wants. Thus he may ask, 
"Size 32?" or, "Do you prefer a dark or light color?" 
The salesman, however, should not narrow the choice 
too much. For example, the "salesman" asks the size 
of the hat and finds that the prospect wears a 7%, then 
asks for the color and finds that the prospect prefers a 
dark gray, and then discovers that he does not have a 
dark gray hat in stock. He has placed himself at 



Retail Salesmanship 473 

a disadvantage. Perhaps the buyer had no definite pref- 
erence and would have just as readily taken a light gray 
or a brown, if the salesman had not forced him to ex- 
press a preference. However, he has gone on record as 
wanting a dark gray. The salesman must lose the sale 
or persuade the customer to take another color. 

A distinction may be made between convenience and 
shopping goods. The customer usually knows what she 
wants when she enters a store to buy convenience goods. 
She generally asks for the product by brand, by size, 
or by color. It is usually best for the salesman to hand 
out the goods desired at once, although he may also offer 
substitutes. With shopping goods, the matter is dif- 
ferent. The customer usually does not know exactly 
what she wants. She usually wants to look over a va- 
riety of goods and make a selection. The salesman 
should not ask too many questions before he begins to 
display his wares. He should watch the customer and 
take away promptly the goods in which she is not inter- 
ested. He can determine her preferences as to color, 
style, and price by the way she examines the goods and 
by her remarks. When she cannot make up her mind, 
the salesman may concentrate his efforts on the article 
which he feels is best suited to the buyer or to the article 
that he feels that she really prefers. He talks about the 
advantages of the article, how it will serve her needs, and 
how much satisfaction, service, and pleasure it will give. 

Selling to two people. At times the salesman must 
sell to two or more people. This is usually more diffi- 
cult than selling to one person. Man and wife may shop 
together, or the customer may bring a friend. The 
salesman needs an unusual amount of patience and tact 
when two people must be sold. At times he must show 
goods until he finds something that both like. At other 



474 Retail Salesmanship 

times he tries to determine which person dominates the 
purchase and concentrates on her without appearing 
to ignore the other. When he finds which article the 
dominant person prefers, he tries to secure the approval 
of the other by pointing out its good points and asking 
questions that suggest affirmative answers. To illus- 
trate, "That's a beautiful color, isn't it? Doesn't that 
harmonize nicely with your furniture?" 

Substitution. It often happens that the desired arti- 
cle is not in stock. The salesman may then offer a sub- 
stitute or offer to order the article for the customer. He 
should not offer a substitute as the desired article, but 
he may indicate that it is of equal or better quality. 
He should not push the substitute unless the buyer is 
interested. If she is interested, however, he should pro- 
ceed with the sale just as if the article had been re- 
quested in the first place. At times the salesman may 
feel that another article would meet the buyer's needs 
better than the one requested; or he may prefer to sell 
a substitute article because it carries a larger margin or 
because he has an overstock. In such cases he should 
first show the article asked for. He may then say, "Here 
is another article which I believe you will like better," 
or "Here is a better value." In no case should a substi- 
tute be forced on the buyer. Neither should a substitute 
be offered unless it is adapted to the buyer's needs. 

Creating desire. Creating desire is the most impor- 
tant part of selling. It is in this aspect of selling that 
retail salespeople are weakest. It is more difficult for 
them to create desire than for wholesale and specialty 
salesmen, because retail salesmen cannot use "high pres- 
sure" methods or force sales. If they do, they are in 
danger of antagonizing their customers. 

The weakness of retail selling is illustrated by the 



Retail Salesmanship 475 

figures in Table 44 which show the ratings of salespeople 
made by their customers. The salespeople were rated 
on five qualities: their personal appearance; their ap- 
proach; their interest in the customer, in the merchan- 
dise, and in the store; their knowledge of the goods 
uses, qualities, colors, and styles; and their ability to 
create desire. It will be seen that these salespeople had 

TABLE 44. RATING OF 106 RETAIL SALESPEOPLE 

RATING OF SALESPEOPLE 

Quality Rated Good Fair Poor 

Appearance 58 29 19 

Approach 53 24 29 

Interest in customer and goods* . . 47 31 27 

Knowledge of goods 59 27 20 

Creation of desire 24 30 52 

*One salesperson not rated on this factor. 

the best rating on their appearance and on their knowl- 
edge of the goods. One-half of the salespeople had a 
"good" rating on these factors, and only one-fifth had a 
"poor" rating. The approach of these salespeople was 
not quite so good. Their interest in the customers and 
in their work was quite a bit poorer. In, their ability to 
create desire they ranked very low, only 24 of the 106 
salespeople having a good rating, while 52, or approx- 
imately one-half, had a poor rating. 

Why is it that salespeople who have a good appear- 
ance, who know how to approach their customers, and 
who have a good knowledge of their goods fall down 
miserably in making their prospects want the goods? 
The answer must be either that many of these people 
know nothing about salesmanship and have no ability 
to sell, or that they have become so accustomed to filling 
orders that they have forgotten how to practice sales- 
manship and have degenerated into "clerks." Desire can 
be created by knowing the customer's needs, knowing 



476 Retail Salesmanship 

the goods and their uses, and picturing in an interested 
and enthusiastic way the satisfaction which the goods 
will give. 

The close. The retail customer often brings the sale 
to a close by saying that she will take the article. If 
she is undecided, the salesman can use the methods of 
closing previously described, such, for example, as closing 
on a minor point, answering additional objections, or 
giving additional information to strengthen the desire. 
When the customer is undecided, she often says that she 
wants to look about a little more or that she wants to 
think the matter over. This sometimes places the sales- 
man in a difficult situation, as he and the goods will 
probably still be available after she reaches a decision. 
At times he points out that an immediate decision is 
desirable as the article may be sold to someone else if 
she delays, or that a price advance is to be expected. 
At other times he may try to answer the buyer's un- 
stated objections or he may go back and try to strengthen 
her desire. He must, however, be careful not to attempt 
to force the sale in such a way as to antagonize his pros- 
pect. 

Some salesmen try to close the sale by suggesting that 
the customer take the article home and "if you don't 
like it, you may return it." This is usually very poor 
business as it increases the amount of returned goods 
and increases the store's expense. It should be done 
only when the salesman feels confident that the article 
will be kept. 

Suggestive selling. Suggestive selling may greatly 
increase the salesman's volume. When he sells one ar- 
ticle, he may call his customer's attention to other ar- 
ticles. These may be new goods just received, goods 
that are on sale at reduced prices, articles that are es- 



Retail Salesmanship 477 

pecially suited to the customer, or any attractive goods 
that the salesman feels are adapted to the needs of the 
buyer. The salesman may say: "We have just received 
a new lot of very nice dresses which I believe you would 
like, the very latest styles" ; or, "We have a special bar- 
gain today in towels"; or, "We have some beautiful blue 
taffeta, just the shade you like." On making a sale of 
shoes, the salesman may suggest, "Wouldn't you like 
some hosiery to match the shoes?" Or, upon selling 
shirts he may suggest the purchase of ties. Suggestive 
selling of the latter kind is known as "ensemble selling" 
or "selling companion goods." 

The grocery salesman has an excellent opportunity for 
suggestive selling. Most of us are interested in foods 
and like a varied diet. Therefore we like the salesman 
to call our attention to fresh goods, new products, or ar- 
ticles of unusual quality. The salesman may say: "We 
have some very fine freestone peaches today." "We have 
some roasting ears fresh from the field, the best we've 
had this year." "How about some nice fresh blueber- 
ries? They make the most delicious pies." "We have 
a mighty fine value in canned peaches." 

Telephone selling. Many salesmen use the telephone 
to increase their sales. They may telephone on rainy 
days when there are few customers in the store. They 
may call their customers to tell them about new goods 
that have just been received. They may tell about 
goods that they feel are especially suited to the individ- 
ual needs of their customers, or they may call the atten- 
tion of their customers to goods on special sale. 

Opportunity for real salesmanship. By knowing his 
goods and his customers, by knowing how to create de- 
sire, by using suggestive selling, and by using the tele- 
phone, the retail salesman can be a real salesman. He 



478 Retail Salesmanship 

can practice a high grade of salesmanship even though a 
considerable portion of his time is occupied in the cleri- 
cal work of filling orders. The personal traits necessary 
for success in selling are discussed in the next chapter. 

Chapter 29 
Review Questions 

1. How does retail selling differ from other types of 
selling? 

2. In what ways is retail selling easier than other types 
of selling? 

3. In what way is retail selling more difficult than other 
types of selling? 

4. Why are retail salespeople sometimes called "clerks"? 

5. Does the retail salesman have to make preapproaches? 

6. What should the retail salesman know about his regular 
customers? 

7. How should the salesman approach and greet the 
customer? 

8. What is meant by the size-up? 

9. Is the size-up important? Why, or why not? 

10. How can the salesman size up his customers? 

11. What is the salesman's first problem after greeting the 
customer? 

12. What is meant by saying that the salesman "should not 
narrow the choice too much." 

13. What is the difference in the way shopping and con- 
venience goods should be shown to the customers? 

14. How should the salesman help the hesitating buyer to 
reach a decision? 

15. How should the salesman proceed when necessary to 
sell two or more people? 



Retail Salesmanship 479 

16. What is meant by substitution? What rules should 
the salesman follow in offering substitutes? 

17. Why do retail salespeople have so much difficulty in 
creating desire? 

18. How may retail salespeople create desire? 

19. What should the salesman do when the customer says 
that she wants to think about the purchase a little more 
before making her decision*? 

20. Should the salesman suggest taking the article home 
and returning it if the customer decides she doesn't like it? 

21. What is meant by suggestive selling? How may it be 
used? 

22. When and how may the salesman use the telephone? 

Thought Problems 

1. Some stores teach their salespeople to substitute goods 
under their own private brands or other goods carrying larger 
margins on every possible occasion when goods carrying 
smaller margins are requested. Other stores instruct their 
salesmen never to substitute. What do you think of these 
two policies? Which is the better? What policy should a 
retailer follow in regard to substituting? 

2. What do you think of reading peoples' characteristics 
from the shape of their heads, features, and the color of 
their eyes and skin? 

3. Do you think that it is possible for the salesman to 
size up his customers by observing their actions and words 
closely? Give your reasons. 

4. Visit retail stores and rate the salespeople who wait 
on you on blanks like that on page 480 marked "Shopper's 
Report on Retail Salespeople. " You do not have to make 
purchases, but you should act naturally as a real prospective 
buyer. (Prepare 'the necessary blanks for the number of re- 
ports required by your instructor.) 



SHOPPER'S REPORT ON RETAIL SALESPEOPLE 
Store 



Date and hour- 



Name or number or description of salesperson- 



Article- 



-RATING- 



_ . . _ Value Good Fair Poor Remarks 

Points observed: 



Appearance 15% 



Approach 10% 



Interest in customer, 

merchandise, and store 15% 



Knowledge of goods, uses, 

colors, qualities, style, etc. 25% 



Force or ability to create desire 35% 

Total rating percentage 100% 

(80-100%, Good; 60-79%, Fair; under 60%, Poor) 

Comments: 

Did salesperson offer to substitute? 

Did salesperson use suggestive selling? 

Promptness in wrapping, making change, or making out sales slip or 

want slip? 

Did salesperson call back amount of money in making change? 

Would you want the salesperson to wait on you again? 

Other comments: 

480 



CHAPTER 30 

Success in Selling 

Qualifications for success. Success in selling depends 
upon knowledge, hard work, and certain personal traits 
or qualities. These qualifications may be summarized 
as follows: 

I. Knowledge of: 

A. Goods 

B. Principles of salesmanship 
II. Personality: 

A. Obvious or superficial aspects: 

1. Appearance neatness, clothes, bearing or 
posture 

2. Facial expression 

3. Pleasing voice 

4. Manners (courtesy) 

5. Breath not offensive 

6. Ability to talk intelligently on a variety 
of subjects 

B. Fundamental traits: 

1. Good health 

2. Honesty 

3. Industry 

4. Perseverance 

5. Self-confidence 

6. Enthusiasm 

7. Sincerity 

8. Initiative 

9. Tact 

Many of these qualities are necessary for success in 
any kind of work; some of them are especially impor- 

481 



482 Success in Selling 

tant for success in selling. Specialized knowledge is 
necessary for success in almost any line of work. A 
pleasing personality is helpful in any vocation but is 
particularly important for the salesman. Of the funda- 
mental, or character, traits, the first four are very im- 
portant in any calling, while the last five are especially 
important to the salesman, although they, too, are im- 
portant in many other kinds of work. 

Knowledge. The salesman needs to have a thorough 
knowledge of his goods and of their uses, and he should 
be able to impart this knowledge to others. He should 
know the principles of salesmanship as explained in the 
preceding chapters. The salesman should know all about 
his product how it is made, the kind of raw materials 
used, the reason for its design, and the advantages of all 
attachments. He should understand all of its uses. 
He should know the services his company renders and 
its policies. 

The salesman should also know all about competing 
products, so that he can answer objections. He should 
not "knock" his competitors or their goods (unless 
they are fraudulent). He should not ordinarily mention 
his competitors unless the prospect brings them into the 
discussion. 

The salesman should know his goods so thoroughly 
that he can see talking points sticking out all over them. 
Here is an aluminum teakettle. One man sees only a 
teakettle. The salesman, who knows his product, how- 
ever, sees much more than a teakettle. He sees that it 
has a wooden handle that does not get hot easily. He 
sees that this handle is hexagonal so that the hand can 
grip it tightly. He sees that the handle ears are welded 
on and not fastened on with rivets which will wear loose. 
He sees that the spout is welded on. He sees that the 



Success in Selling 483 

ears which hold the handle are so made that the handle 
cannot touch the hot sides of the kettle. He sees that 
the lid of the kettle has a wooden knob which will not 
burn the hand when one is lifting it. He sees that the 
kettle has a very wide base which decreases the time 
necessary for heating. He sees the very fine finish on 
the metal. He sees the trademark, and he knows that 
this stands for reputation and gives a guarantee of high 
quality. 

Securing information. Many companies have train- 
ing courses or sales manuals which give much informa- 
tion on the company's products; the salesman should 
study these sales manuals when they are available. He 
should read trade papers covering his product, as they 
contain much valuable information about the product 
and how to sell it. Books treating the products may also 
be available, and study and use of the product itself is 
extremely helpful. The salesman should talk to users 
of the product. The retail salespeople can give the 
wholesale salesman much valuable information. 

The retail salesman. Retail merchants all too fre- 
quently fail to give their salespeople the information 
necessary for the intelligent sale of their goods. Re- 
gardless of the training given by his employer, the sales- 
man should study his goods and obtain information for 
himself. He should listen to the sales talks given by the 
wholesale salesman, when this is possible. He should 
read the labels on the packages and find what claims 
are made for the goods and what instructions are neces- 
sary for their use. He should read one or more trade 
papers in the field. He should read women's magazines. 
These magazines will give much information about vari- 
ous kinds of goods used in the homes, about the adver- 
tising that is reaching the women, and about the woman's 



484 Success in Selling 

point of view. This is important, for women make up 
the majority of purchasers in most retail stores. 

Many manuals have been prepared covering various 
lines of merchandise, such as suits, sweaters, hosiery, 
men's furnishings, glassware, silks, house dresses, jewelry, 
notions, household furnishings, and so forth. The sales- 
man should visit the libraries and write to publishers 1 
and to trade papers to find out what manuals are avail- 
able in his field, and obtain those suited to his needs. 
The salesman should listen to his customers and to other 
users of his products. He can learn much in this way. 
Experience in the stockrooms and in the service depart- 
ment will teach him much. 

Time for study. Any ambitious person is glad to use 
a portion of his evenings for the study of his work. 
Salesmen should also find plenty of time for study at 
other times. The traveling salesman spends much time 
waiting for interviews. If he travels by train, he has 
much time on the train which can be used for study. 
The retail salesman has much spare time while waiting 
for customers. Although he must be ready at all times 
to serve a customer on an instant's notice, he may be 
able to find time to study the sales manuals, trade pa- 
pers, and his goods when no customers are in his 
department. 

Can a salesman know too much about his product? 
It is sometimes argued that it is dangerous for a sales- 
man to know a great deal about his product because of 
the danger of boring his customers with details which 
do not interest them. This is an argument against the 



1 The Research Bureau of Retail Training, University of Pittsburgh, 
Pittsburgh, Pa., and The McGraw-Hill Book Co., Inc., and The Ronald 
Press Co., both of New York City, publish series of sales manuals 
covering various types of merchandise. 



Success in Selling 485 

abuse of knowledge and not against knowledge itself. 
The salesman should have the knowledge to use when 
necessary he should use just what he needs in making 
his sales talk and should keep the rest in reserve for 
answering objections and for those customers who want 
complete information. 

Personality. A good personality is always listed as 
an essential qualification for success in selling. There 
are many aspects of personality. Speaking narrowly, 
personality is the appearance a person makes and the 
impression which he creates on first acquaintance. 
Speaking broadly, personality includes not only one's 
appearance, voice, and manner, but all of his traits of 
character and all of his habits. 

Appearance. One is often judged by his appearance. 
It is therefore important that the salesman make a good 
appearance. The salesman should be clean and neat. It 
is not necessary to wear expensive clothes, but the 
clothes should be clean, the suit pressed, the shoes shined, 
and the tie straight. The salesman should carry himself 
well: he should walk erect with a brisk step and shoul- 
ders back. Clothes do not make the man, but knowing 
that he makes a good appearance will help the salesman 
to maintain his self-confidence. The salesman wants to 
center attention on his goods and should therefore not 
attract attention to himself by his attire. His clothing 
and accessories should be conservative, and loud colors 
and unusual adornments should be avoided. 

Facial expression. The facial expression should be 
pleasant. A scowl, frown, or pessimistic expression hurts 
one's appearance. 

Voice. The salesman should cultivate a pleasing voice. 
A man who is very successful in his personal relations 
with others says that he tries to pitch his voice slightly 



486 Success in Selling 

lower than the person to whom he is talking. A harsh, 
shrill, or coarse voice is repulsive. One should pronounce 
each word distinctly and should avoid talking too fast. 
The salesman should cultivate his vocabulary so that 
he can use words properly. Short, simple words are 
preferred, but the vocabulary used should vary some- 
what with the prospects. The salesman should not talk 
"over the heads" of his prospects. He must be more 
careful in his language when talking to educated and 
cultivated people than when selling a rougher class of 
buyers. Some slang is permissible, but the salesman 
should use it with care. The salesman should avoid 
profanity. Some buyers may not object to it, but a 
great many do. The salesman who uses profanity is in 
constant danger of offending some of his prospects. The 
absence of profanity offends no one. 

Manners. The salesman should cultivate courtesy 
and good manners. Rudeness should be avoided at all 
times. A bad breath is very offensive to prospects, and 
the salesman should not hesitate to ask his friends or 
other salesmen whether his breath is offensive. 

Conversation. It is often desirable for a salesman to 
be able to talk interestingly on a variety of topics. To be 
able to do this, he must have some knowledge of many 
things baseball, golf, football, current news, and so 
forth. He must, of course, be very discreet in discussing 
religion and politics. Although it is desirable to be a 
good conversationalist, this is not absolutely necessary 
to be successful in selling. 

Health. It is very difficult for one to succeed without 
good health and the energy, endurance, and vitality 
which good health gives. The traveling salesman often 
has irregular sleep and meals. The retail salesman is on 
his feet many hours a day and spends practically all the 



Success in Selling 487 

daylight hours inside. For these reasons, the salesman 
should devote time and attention to his health. 

Honesty. Honesty is a prerequisite for successful 
work in any legitimate business. The salesman should 
be honest with his customers, with his company, and 
with himself. 

Industry. Hard work has helped many men to suc- 
cess. Some men have succeeded without industry, but 
these are the exceptions. Unless a man is outstanding 
in some other way, he will lose out in the competitive 
struggle if he does not work hard and consistently. Foot- 
work and shoe leather are important to a salesman's 
success. Industry is a trait that can be developed. A 
lazy person can force himself to work, and by working 
consistently he develops the habit of industry. Industry 
alone, however, will not make a man successful, for 
he must also work intelligently. 

Perseverance. One should not only be industrious, 
but should be persistently industrious. The salesman 
needs to keep constantly at work, even when business 
is bad and when he is discouraged. Salesmen often 
become disceuraged. Disagreeable prospects must be 
seen. It is very easy for the salesman to make excuses 
and to persuade himself to take a rest. "It's too hot 
to sell anything." "I can't get any business this week 
everyone is away on his vacation." "Everybody is too 
busy on Saturday to talk to a salesman." "It's too 
late to make any more calls today." These are typical 
excuses. The salesman needs perseverance so that he 
will not allow such excuses to cause him to stop work. 
Perseverance keeps a salesman calling on prospects 
even when the outlook for business is poor. 

Confidence. A salesman needs confidence in his prod- 
uct, in his employer, and in himself. If he does not 



488 Success in Selling 

sincerely feel that he has a good product, he should not 
sell it. If his employer does not deserve his respect 
and confidence, he should get another job. If a salesman 
loses his self-confidence, it is very hard for him to con- 
vince others, and this means that it is very hard for 
him to make sales. 

Self-confidence is a belief in one's self and in one's 
ability. It grows out of accomplishment, out of success- 
ful work, and out of a knowledge that one can do things. 
It develops from a knowledge that buyers have been 
met and sales have been made. When just beginning 
work, or when sales are few, the salesman often needs 
courage and "nerve" to keep up his confidence. He 
must think in terms of success. He should remember 
that the other fellow is just a human being like himself. 
Some people have too much confidence are over- 
confident. It is better for a salesman to have too much 
than too little confidence. Yet over-confidence is dan- 
gerous, for it leads the salesman to depend too much on 
his own ability and not enough on knowledge of his 
goods, on the preapproach, and on planned sales talks. 

Enthusiasm. Enthusiasm is described las "exalted or 
ecstatic feeling/' and as confidence energized and put 
to work. A salesman may be said to be enthusiastic 
when he is sincerely excited about his product. Enthu- 
siasm is a great help in selling because it is contagious 
and helps to arouse the prospect's desire. It has been 
said that most of the worthwhile things in the world 
are done by enthusiastic people. 

Some people are naturally enthusiastic, while others 
must develop their enthusiasm. Enthusiasm may be 
developed by a thorough knowledge of the goods. If 
one knows his goods thoroughly and the satisfaction 
which they give, enthusiasm is easy to develop. It is 



Success in Selling 489 

said that there is a romance behind every product; it 
may be in the way the product was discovered or the 
method of producing it, in a description of the countries 
from which the raw materials come, in the methods 
of manufacture, or in the work which the product does. 

Sincerity. A person is sincere when he is in reality 
what he appears to be when he means exactly what 
he says. The salesman is sincere when he has an honest 
and genuine belief in what he says. Sincerity carries 
conviction. The buyer is inclined to be suspicious of 
the salesman's enthusiasm, and if he feels that the 
salesman is insincere, he discounts all of his statements. 
But if he believes that the salesman is sincere, what 
the salesman says carries weight. 

Initiative. The dictionary defines initiative as "abil- 
ity for original conception and independent action." 
Initiative is to a person what the self-starter is to an 
automobile. Many people do not have self-starters and 
must be "cranked up" to get action. The man with 
initiative can meet new circumstances. He is able to 
think of plans in emergencies, and he continually does 
more than is expected. The exercise of initiative de- 
velops judgment, and, when coupled with industry and 
good health, it gives vitality and aggressiveness. Ag- 
gressiveness is very important in a salesman, particularly 
in the specialty salesman. The salesman is always meet- 
ing new situations. No two customers are exactly alike. 
Initiative helps the salesman to meet new situations 
and to work out answers to new objections. The retail 
salesman with initiative does not wait for his employer 
to give him information about his goods to begin study- 
ing them. 

Initiative keeps a person out of a rut. People are 
prone to get in the habit of doing the same old things 



490 Success in Selling 

in the same old ways. The salesman too often gets in 
the habit of calling on the same customers and of saying 
the same things. Initiative will help him secure new 
prospects, new facts, and new sales points. 

Tact. Tact has been defined as a mental alertness 
which enables us to say and do what is right under 
the circumstances. It is a quick appreciation of what 
is fit or proper. To the salesman it means that he varies 
his manner and his method to fit his prospects. It 
involves the use of patience, cheerfulness, courtesy, and 
graciousness. Some people think that tact depends upon 
intuition and cannot be developed that one either has 
or does not have it. Some people are naturally more 
tactful than others. Nevertheless tact can be developed 
to a certain extent. It is based on the "you" attitude, 
of considering what is going on in the other fellow's 
mind, and of thinking of how he will react to certain 
statements and actions. Thus if one will develop the 
habit of observation and of thinking from the other 
fellow's viewpoint, he can develop tact. 

As the salesman's job is to influence others, he should 
be very tactful. The salesman who is tactful varies his 
manner and his method to fit his various customers. 
He refrains from doing or saying things to hurt their 
feelings and avoids arguments. 

Tact is often in conflict with some of the other traits 
that are needed by the salesman. The person who is 
aggressive, who has initiative, who is enthusiastic, and 
who possesses a great deal of self-confidence is likely 
to be untactful, for it is very hard for a person to develop 
his self-confidence to a high degree without becoming 
egotistic. The egotist usually lacks tact. It is possible, 
but difficult, to possess to high degrees both self- 
confidence and tact. 



Success in Selling 491 

Other traits. Many other qualities that are desirable 
for the salesman might be listed. Among these are 
imagination, courage, optimism, and the ability to benefit 
by criticism. The salesman needs imagination in order 
to visualise the customer's use of the product. The 
salesman needs courage to enable him to call upon 
difficult and disagreeable prospects and to meet stiff 
competition. The salesman needs optimism, for without 
optimism it is very difficult to become enthusiastic. 
People dislike pessimists and it is very difficult for a 
pessimist to make a good salesman. 

All traits not necessary. It would perhaps be impos- 
sible to find one person who had all of the traits and 
qualities discussed in this chapter developed to a high 
degree. One may succeed because he has a few of these 
qualities developed to a high degree, or because he has 
several of them developed to a fair degree. 

Chapter 30 

Review Questions 

L What are the qualifications necessary for success in 
selling? 

2. Are all of the qualifications listed necessary for success 
in selling? 

3. Which of these qualifications do you feel are most 
important for a salesman? 

4. What should a salesman know about his product? 

5. How may a salesman secure the needed information 
about his goods? 

6. Should the retail salesman read women's magazines? 
Why, or why not? 

7. How can the retail salesman find out whether sales 
manuals describing the goods which he sells are available? 



8. Can a salesman know too much about his product? 

Why? 

9. What is personality? 

10. Can one's appearance be changed? What kind of 
appearance should the salesman make? 

11. Can one develop a pleasant facial expression? 

12. Can one develop a pleasing voice? 

13. How may good manners be obtained? 

14. Why should a salesman have a knowledge of a variety 
of subjects.? 

15. Is good health necessary to success? 

16. Can one develop good health? 

17. Is industry necessary to success? 

18. Can industry be developed? Are some people born 
lazy? 

19. What is meant by perseverance? 

20. What is meant by self-confidence? 

21. Can one develop his self-confidence? If so, how? If 
not, why? 

22. What is meant by enthusiasm? 

23. Must one be enthusiastic to succeed in selling? In 
other work? 

24. Can one lacking enthusiasm develop this trait? 

25. What is meant by sincerity? 

26. Must a salesman be sincere to succeed? 

27. Can sincerity be developed? 

28. What is meant by initiative? 

29. Can initiative be developed? 

30. What is meant by tact? 

31. Does a salesman have to be tactful to be successful? 

32. Is it possible to be tactful and at the same time to be 
self-confident and aggressive? 



Success in Selling 493 

33. It has been said that some people are born tactful and 
others are born tactless. How about it? 

34. What traits besides those included in the outline are 
desirable? 

35. Does the salesman have to have all of the traits in- 
cluded in the outline developed to a high degree to be suc- 
cessful? If not, which traits do you consider the most 
important? 

Thought Problems 

1. To what extent is the employer responsible for teach- 
ing the salesman what he needs to know about the goods, 
and to what extent is the salesman responsible for securing 
this information for himself? 

2. Is it better for a salesman to try to develop all of the 
traits listed, or to try to develop some of them to a very 
high degree and to depend upon his strength in these to 
offset his weakness in other traits? 

3. How many important character traits, or aspects of 
personality, can you name that were not listed in this chapter? 
Do not include in the list terms that are only synonyms of 
the terms listed. 

4. Rate yourself on the rating blank on page 494 or 
one similar to it. This is to be done in confidence and you 
are to state your frank opinion of yourself after thinking 
the matter over carefully. Rate yourself without consulting 
others. It is not necessary for you to show your ratings 
to other students nor for you to see the ratings of other 
students. 

Before rating yourself on any trait, select the person who 
has the trait in question most highly developed among all 
the people you know or have read about. Take this person 
as 100 per cent and rate yourself by comparison. For ex- 
ample, take the most industrious person you have known 
or have read about and consider his industry as 100 per 
cent; then rate yourself accordingly. Select the most sincere 
person you know (probably a different person) and take 



SELF-ANALYSIS CHART 



Rate yourself on the following personal qualities or traits as excellent 
(90-100 per cent), good (75-89 per cent), fair (60-74 per cent), moderate 
(45-59 per cent), and poor (under 45 per cent). 



1. Appearance: 
Neatness 



Percentage: 



Facial expression- 
Bearing 



Appearance average 



2. Speech: 
Voice- 



Vocabulary 

Ability to converse interestingly on a variety 
of subjects 



3. Courtesy- 

4. Sincerity - 



5. Enthusiasm. 



6. Self -confidence _ 

7. Honesty 

8. Courage 



9. Initiative- 



10. Aggressiveness- 



11. Tact- 



12. Industry - 



13. Perseverance - 

14. Health 



Speech average 



Average rating- 



494 



Success in Selling 495 

his sincerity as 100 per cent; then rate yourself by comparison 
to him. 

When you have finished the ratings, study them carefully 
and see where you are low. Work out methods by which 
you will try to improve your poorest traits. 

The rating blanks may be handed in to the instructor for 
comparison to determine the average rating of the class on 
each trait. 

5. Using the method explained in Problem 4, rate other 
members of your class. 



CHAPTER 31 

Sales Management 

The sales department. A company's sales policies are 
formulated by the chief sales executive or by the officials 
or board of directors. The sales policies of a company 
include the method of distributing its products, its 
prices, its service policies, the methods used in adver- 
tising and the amount done, and the organization of its 
sales department. The sales department is usually in 
the charge of a sales manager, who carries out the 
company's selling policies. The sales manager's job is 
to hire, train, supervise, and reward the salesmen. He 
may also formulate or help to formulate the sales poli- 
cies. 

Hiring salesmen: Type of men needed. Different 
companies need different types of salesmen. If a com- 
pany sells its products to business executives, it needs 
well-educated and intelligent salesmen who have good 
manners, and who make good appearances. On the 
other hand, if it sells to the small retailers, it may use 
less polished men. 

If a company has a technical or highly complicated 
mechanical product, it may need technically trained men. 
It may employ graduate engineers, trained chemists, 
or skilled mechanics. On the other hand, if the product 
is a simple one (such, for example, as breakfast cereals 
or toothpaste) technically trained men are unnecessary. 

A new product needs a higher type of salesman than 

496 



Sales Management 497 

a product which has an established reputation and mar- 
ket. For the latter, order-takers may be able to do the 
work. 

Sources of men. The following are some of the more 
common sources of salesmen: high schools; colleges; 
employees in the office, stockroom, or factory; expe- 
rienced salesmen with other companies; retail sales- 
people; and men in other kinds of work who feel that 
they have sales ability. 

The company with a technical product may want 
university graduates. The machine company may select 
mechanics from its own or other factories. A whole- 
saler may select his salesmen from promising retail 
salespeople. The retail store may select its salespeople 
from high school graduates and friends of present em- 
ployees. Some companies prefer to hire experienced 
salesmen and may take men from competing concerns 
or from salesmen who have sold other types of products. 
Other companies prefer to hire men without sales expe- 
rience and train them to suit their needs. Some com- 
panies hire office boys and clerks whom they feel have 
the ability to develop into salesmen. 

Securing applications. The sales manager may have 
his salesmen keep their eyes open for promising pros- 
pects among their customers and acquaintances. The 
sales manager may visit high schools and colleges and 
interview seniors who are recommended by the faculties. 
He may advertise for salesmen in trade and business 
papers. For retail salesmen and many types of specialty 
salesmen, he may advertise in the newspapers. Many 
applicants apply for positions voluntarily; this is espe- 
cially true with large or well-known companies. 

Selecting men. Success in selling depends largely 
upon such traits as industry, enthusiasm, self-confidence, 



498 Sales Management 

tact, sincerity, and perseverance, which are hard to 
measure. We cannot merely look at a man and tell how 
highly he has developed these traits. The principal 
methods of selecting salesmen are by interviews with 
them; by examining their past records as obtained from 
application blanks, former employers, and references; 
and by giving trade and psychological tests. 

Interviews. The interview may be of great help 
in determining a man's appearance, neatness, manners, 
voice, bearing, and ability to meet people and carry on 
intelligent and interesting conversations. The employer 
may invite the applicant to a meal or spend some time 
with him socially. It is desirable to have an applicant 
interviewed two or three times, as he may be nervous 
on his first appearance; and it is also well to have him 
interviewed by more than one person. 

In order to find out something about the applicant's 
self-confidence and ambition, he may be asked why he 
wants to sell this product; why he wants to work for 
this company; and how much he thinks he can earn. 
He may also be asked to fill out a self-rating blank 
similar to the one at the end of the last chapter. 

Application blanks. Application blanks usually 
ask for information about the applicant's education, 
business experience, family responsibilities, former em- 
ployers, salaries received, and reasons for leaving former 
positions. Some employers prefer men with sales expe- 
rience in the same line and some desire those with 
experience selling other lines, while others prefer men 
without any sales experience. 

Married men may be preferred for local territories, 
as they are more steady and reliable. For large terri- 
tories where the men are traveling most of the time, 
younger, unmarried men are likely to be preferred, since 



Sales Management 499 

such territories keep them away from home most of the 
time. For positions with small pay, the employer should 
know the applicant's family responsibilities. If the ap- 
plicant has to support a family, he may be greatly 
dissatisfied or worried about financial matters and may 
be tempted to be dishonest. 

Former employers and references. Information 
is often obtained from the people given as references by 
the applicant. Care must be used in interpreting the 
information given by references, especially those un- 
known to the employer. The sales manager may re- 
ceive more accurate information from former employers 
and others who know the applicant but who were not 
given as references. Some sales managers secure infor- 
mation about the applicant's character and experience 
from local credit bureaus. A person who has changed 
jobs frequently without bettering himself is likely to 
be a floater who will soon become dissatisfied. However, 
if he has bettered himself by each change, he* probably 
possesses ambition, initiative, and self-confidence. 

Tests. Salesmen with high intelligence are 
needed for selling complicated products and for calling 
upon skilled buyers; but, on the whole, success in selling 
does not depend primarily upon intelligence. For this 
reason relatively little use is made of intelligence tests 
in selecting salesmen. Trade tests, however, may be 
used to advantage in determining how much the appli- 
cant knows about the goods and about the principles 
of salesmanship. 

Training salesmen. Some of the more widely used 
methods of training salesmen involve: sales manuals; 
standardized sales talks; coaching by older salesmen; 
sales meetings; sales conventions; work in the company's 
factory; and sales schools. 



500 Sales Management 

Many high schools, universities, and evening schools 
of business administration offer courses in salesmanship. 
These courses are usually very good, but usually are 
limited in that they teach only the general principles 
and cannot ordinarily give detailed instruction on spe- 
cific products. Employers usually must give this in- 
struction. 

Many companies have sales manuals which the new 
men are required to study. Companies using standard- 
ized sales talks require the new men to learn these 
talks. New salesmen usually have their work explained 
to them by the sales manager or person in charge of 
sales training; this may be done in a few talks or in a 
series of lectures. 

New salesmen may be turned over to older salesmen 
who explain the goods to them and who show them how 
to make sales. In a retail store the new salesgirl is 
often turned over to an experienced salesgirl who acts 
as her sponsor until she learns her duties. New field men 
may be assigned as junior salesmen to work under senior 
salesmen. Training may also be given by special coaches, 
by supervisors, or by the sales manager. 

Many companies have regular sales meetings at which 
the merchandise, sales methods, and company policies 
are discussed. Such meetings may be held weekly or 
less frequently. Sales conventions are usually held once 
or twice a year and are designed to stimulate and instruct 
the salesmen. Both sales meetings and conventions are 
primarily for the older salesmen, or the company's 
dealers, but they may also be used in training new men. 

Many companies have regular sales training courses. 
These are often a combination of work in the classroom 
with work in the plant, stockroom, warehouse, and office. 
The courses vary from a few weeks to several months 



Sales Management 501 

in length. They give the new salesmen a knowledge of 
the company's products, organization, sales methods, 
and the principles and practice of salesmanship. Train- 
ing courses are more often conducted by large companies, 
which need many salesmen and hence can afford the 
expense of conducting the courses, than by smaller 
companies. Smaller companies often secure trained men 
after they have had experience in selling with others. 
Sales training courses may be given to new men or may 
be given only to men who have demonstrated by actual 
work that they have sales ability. 

A small, well-trained sales force is often better than 
a large and untrained force. Some companies have in- 
creased their sales from 25 to 200 per cent by a complete 
and thorough training of their salesmen. Often the 
increased volume has been secured with a reduced 
number of men. 

Supervising salesmen. The sales manager should 
watch his men and check their work closely. He wants 
them to cover all of their territories, call upon all of 
their prospects, push all products, send in the required 
reports, treat their customers properly, and carry out 
the company's policies. Salesmen are likely to skip 
territories which are hard to reach and prospects who 
are not promising. They often fail to use the sales talks 
and methods of approach recommended by the sales 
manager. They may fail to give demonstrations, to 
put out advertising matter, or to properly service the 
company's products. Salesmen may fail to serve the 
customers promptly, may fail to give full information 
about the goods, may be rude, may fail to make out 
want slips, may fill out sales slips incorrectly, or may 
be slovenly in appearance. 

It is evident that the proper supervision of salesmen 



502 Sales Management 

is a difficult task. This is particularly true of traveling 
men. Some companies provide supervisors who spend 
their time in the field visiting the salesmen and accom- 
panying them on calls upon their prospects. Retail 
stores often employ, in addition to department managers 
and floor supervisors, professional shoppers who visit 
the stores and report on the treatment received from the 
salespeople. 

Research, or analysis, is often helpful in sales super- 
vision. In addition to showing the total sales volume 
of each man by products, it may show the number of 
customers visited, the sales to each customer, the number 
of new customers secured, the number of old customers 
lost, and the profit realized by each salesman. Such 
analysis often shows that some salesmen do not push 
the full line and that others do not call upon all of their 
customers regularly. Analysis may show, for example, 
that salesman Jones is not selling a part of his line 
to customer Smith. The matter is called to Jones' at- 
tention, and if there is no good reason, he is told to 
make a special effort to sell the entire line to this dealer 
on his next call. When such information is called to 
the salesman's attention, he knows that his operations 
are being checked, and he is not so likely to be careless. 

Stimulating salesmen. Traveling salesmen work by 
themselves. They are calling upon buyers who are often 
uninterested or hostile. It is very easy for them to 
become discouraged, and it is hard for discouraged men 
to get good results, for success depends to a considerable 
extent upon enthusiasm, confidence, and energy. The 
sales manager's task is to keep his men enthusiastic and 
energetic. To do this he writes them letters, visits them 
in the field, calls them together for sales meetings and 
conventions, or issues a house paper (organ). No two 



Sales Management 503 

salesmen are exactly alike, for which reason they need 
the personal attention of the sales manager. The man- 
ager may have to encourage one man with praise and 
scold another man for his laziness. He should maintain 
strict discipline and at the same time secure the respect, 
friendship, and confidence of his men. 

Sales contests are often used to stimulate men. Prizes 
may be given to the men who sell the most goods, who 
secure the largest increase in sales, who make the most 
calls, or who secure the largest number of new customers. 
The salesmen may be divided into teams and contests 
may be staged between the different teams. The suc- 
cessful salesmen have their names in the house organ 
and, if they become more successful, have their pictures 
printed with accounts of their methods. The house 
organ thus helps to stimulate the men and to build 
morale. 

The most important method of stimulating the men, 
however, is through their pay checks. 

Paying salesmen. The most widely used methods of 
paying salesmen are the straight salary, the straight 
commission, the salary and commission, and various 
forms of bonuses. 

Straight salary. The straight salary is a very widely 
used method. It is used by many retail stores, by many 
manufacturers and wholesalers whose men cover regular 
territories, and by manufacturers of industrial equipment 
whose sales are irregular. The straight salary method 
gives the employer control over his men. As they are 
paid for their time, he can require them to do other 
work than selling such as cleaning up stores, arranging 
stock, putting up displays, arranging displays in cus- 
tomers' stores, repairing goods, making out reports, or 
hunting for new prospects. The assured salary takes 



504 Sales Management 

away a part of the incentive for "high pressure" tactics 
which are so common when the men are paid by com- 
missions. The assured salary relieves the men from 
worry, which is so common with men on straight com- 
missions, and leaves their minds more free for selling. 
It gives a more permanent force of men. Men paid on 
a commission basis are hard to control, have little loyalty 
to the house, and are likely to quit at any time. 

In the sale of industrial equipment, orders may be 
very irregular, depending upon business prosperity. 
Several salesmen may be involved in securing an order. 
Negotiations may extend over many months. In such 
cases, salaries seem to be the only method of paying 
the salesmen, although some form of bonus or profit 
sharing may be added. 

The principal disadvantage of the straight salary 
method is that it does not offer a strong incentive for 
the men to increase their sales. Increased sales do not 
lead to immediate increases in pay. Therefore the sales- 
man may not put forth the effort required to increase 
his sales volume. This disadvantage can be partially 
overcome by increasing the salesman's salary when he 
increases his sales. The practice of raising salaries as 
soon as sales are increased, however, is dangerous. To 
illustrate, suppose that a salesman works for a jobber 
whose margin will allow 2 per cent for salesmen's 
salaries. The salesman has been selling $100,000 a year 
and receiving a salary of $2000. In a given year, he 
sells $150,000 worth of goods and asks for a salary 
increase to $3000. The increase in sales may have been 
caused by business prosperity or some other reason aside 
from the salesman's efforts. If the jobber gives the 
increased salary and the man's sales drop back to 
$100,000, his salary cost rises to 3 per cent. Since the 



Sales Management 505 

salesman objects to a cut in salary, the jobber must 
either stand the increased selling cost or let the salesman 
go. This illustrates why employers are often slow in 
raising salaries. It also shows how the selling costs 
increase under the salary method of paying salesmen. 
However, if the employer does not increase the salaries 
as the salesman increases his sales, then the vSalary 
method does not offer the salesman an incentive to 
do better work. 

The traveling salesman working on a salary usually 
has his expenses paid. The employer may pay all travel- 
ing expenses as reported by the salesman, may make 
a flat monthly allowance for expense, may pay expenses 
of a certain fixed amount per day or per mile for distance 
traveled, or may pay all expenses as long as they are 
within a given percentage of sales. 

Straight commission. Under the straight commission 
method, the salesmen are paid a definite percentage of 
sales and they pay their own expenses. The principal 
advantage of the straight commission method is that it 
gives the men a very definite incentive to increase their 
sales: increased sales mean increased pay. The employer 
has a definite selling cost. He does not have to over-pay 
salesmen who get little business, for they are paid for 
all sales they make ; if their sales decline, their pay 
declines. The straight commission method is often used 
for new products, for products that are hard to sell and 
require real sales ability, and in sales organizations where 
the salesmen must find their own prospects. 

The straight commission method has several disad- 
vantages. The salesmen often use "high pressure" 
methods and antagonize the buyers; they are hard to 
control; they object to doing any work except selling; 
they change positions frequently; and they are often 



506 Sales Management 

poorly trained. Salesmen working on a commission 
basis are inclined to cut prices and to push the goods 
that are easiest to sell. A salesman might actually sell 
a large volume of goods and yet lose money for his 
employer. To avoid this situation, he may be paid 
different percentages on different products, or a certain 
percentage of the margin, or a certain percentage of the 
profit on the goods. This method forces him to con- 
centrate on the high-profit goods. 

To secure the incentive of the straight commission 
method and at the same time avoid its worst disad- 
vantages, a combination of salary and commission is 
often used. 

Salary and commission. Under this method the sales- 
man is guaranteed a certain salary and is paid a com- 
mission on all sales over a stated amount, called a 
quota. The jobber in the illustration above might have 
paid the salesman $2,000, plus a commission on all sales 
over $100,000. If the salesman sold $150,000, he would 
receive his regular $2,000 salary and a commission on 
the $50,000 in excess of his quota. If the rate of com- 
mission was 2 per cent, his commission would have been 
$1,000 and his total earnings $3,000. The next year, 
if his sales dropped to $100,000, he would receive his 
regular salary of $2,000. 

The salesman is thus guaranteed his regular salary 
and so does not have to worry about supporting himself 
and family. At the same time he is offered an incentive 
to increase his sales. If properly adjusted, the salary 
and commission method may have most of the advan- 
tages of both the salary and the commission methods. 
If improperly adjusted, it may have the disadvantages 
of either method. If the quota is set so high that the 



Sales Management 507 

salesman has little hope of reaching it, the commission 
is no incentive to him; the plan is in effect a straight 
salary method. If, on the other hand, the quota is set 
too low, the salesman receives most of his compensation 
from his commissions and so becomes in fact a com- 
mission salesman. Hence the quota of each salesman 
should be set with care. 

The rate of commission paid varies. It may be the 
same rate used by the employer in determining basic 
salaries, or it may be higher or lower. 1 

Bonuses. The salesmen may receive bonuses for sell- 
ing high-profit lines, for selling slow-moving goods, for 
securing new customers, for giving service to the cus- 
tomers, for work in putting out advertising matter, for 
arranging dealer displays, for increasing sales, or for 
their general value to the house as judged by the com- 
pany's executives. Bonuses for selling slow-moving 
goods in retail stores are called "PM's" and "spiffs/ 7 
A certain portion of the company's profits may be set 
aside at the end of the year for division among the 
salesmen. This is called "profit sharing." 

Organization. A small company may use a home of- 
fice organization and direct all of its salesmen from the 
home office. A large company covering a large territory 
will be likely to have branch sales offices located in 



1 Many employers use a lower rate. Thus, if the jobber used a rate 
of 2 per cent in determining basic salaries, he might offer iMs per cent 
commission on all sales over the quota; in the above example, then, the 
salesman would receive $750 commission in the year that he sold 
$150,000. The employer feels that this is enough to stimulate the 
men. On the other hand, some employers may want to give their 
men a stronger incentive to increase sales, and so pay a higher rate of 
commission. Thus, the above jobber might pay 2% per cent com- 
mission on sales from $100,000 to $150,000, 3 per cent on sales from 
$150,000 to $200,000, and 3% per cent on all sales over $200,000. 



508 Sales Management 

various cities. These offices are in the charge of branch 
sales managers, who supervise the salesmen in their 
territories. 

A company with one product or a line of similar 
products will probably have only one sales organization 
if it sells to only one type of buyers. If, on the other 
hand, its customers include different types of buyers, 
it may have a separate sales force for each type. 
Thus a manufacturing company may have one sales 
force to sell the retail dealers, another to sell to whole- 
salers, another to sell to industrial buyers, and a fourth 
to sell institutions. If the company makes a variety of 
dissimilar products, several sales organizations may be 
needed. 

Territories. The sales manager should assign his men 
to territories to which they are suited. Thus a New 
Yorker is said to be poorly adapted to any territory 
distant from New York. Western men are said to be 
needed for far western territories, while southerners 
are best adapted to southern territories. If a territory 
includes a great many foreign-speaking buyers, a sales- 
man familiar with the language is highly desirable. 

The territories should not contain more prospects than 
the salesman is able to handle and yet should be large 
enough to keep him fully employed. Some territories 
have been divided along geographical lines, with the 
result that some salesmen have more prospects than they 
can handle, while others do not have enough prospects 
to keep them busy. The size of a territory should 
depend upon the number of potential customers and 
the transportation facilities, rather than upon the num- 
ber of square miles of area or its population. Some 
companies assign certain lists of prospects to their sales- 
men, rather than give them territories with definite 



Sales Management 509 

geographical boundaries. Under this method the buyers 
are assigned to salesmen who are qualified to serve them 
and a salesman is not expected to call on many different 
types of buyers. 

Chapter 31 

Review Questions 

1. What does the sales policy of a company include? 

2. What is the work of the sales manager? 

3. Why does the type of salesmen needed vary in different 
companies? 

4. From what sources may a sales manager recruit his 
men? 

5. How may the sales manager get in touch with men 
who want positions? 

6. How do sales managers select men? 

7. What can you say of the usefulness of the following 
methods used in selecting salesmen: interviews? application 
blanks? intelligence tests? trade tests? information furnished 
by references? 

8. Name the different methods used in training salesmen. 

9. Why do salesmen have to be supervised? 

10. What methods may the sales manager use in super- 
vising men? 

11. How may sales research or analysis be used in super- 
vising men? 

12. How may salesmen be stimulated? Do salesmen need 
stimulating more than men in other positions? 

13. What can you say of sales contests? 

14. What are the advantages and disadvantages of paying 
salesmen straight salaries? 

15. What is the principal advantage and the principal 
disadvantage of the straight commission method? 



510 Sales Management 

16. What do you think of the salary and commission 
method of paying salesmen? 

17. Is it possible to use a salary-commission method of 
paying salesmen so as to avoid the disadvantages and secure 
the advantages of both the salary and commission methods? 

18. What are bonuses? For what are they paid? 

19. What is the difference between a home office and a 
branch office sales organization? 

20. When does a company need two or more forces of 
salesmen? 

21. How should the sales manager assign territories to his 
men? 

22. What can you say of the policy of assigning each 
salesman a list of customers and prospects, rather than as- 
signing him a definite geographical territory? 

Thought Problems 

1. The sales manager is often a very highly paid man. 
Why? 

2. What qualifications does a man need to become a 
successful sales manager? 

3. Would you say that the sales department was more 
or less important than the following: the production de- 
partment? the advertising department? the finance depart- 
ment? the legal department? 

4. What types of salesmen are needed to sell to the 
following: wholesale grocers? retail grocers? purchasing agents 
for large corporations? housewives on a house-to-house basis? 

5. Do you believe that bonuses are really effective stimu- 
lants to salesmen? 

6. Do men or women make the best salespeople in selling 
the following types of goods in retail stores: furniture? men's 
clothing? kitchen supplies? groceries? cheap jewelry? high- 
priced jewelry? women's coats? electrical merchandise? 
radios? musical instruments? 



Sales Management 511 

7. When a salary and commission method is used, should 
the rate of commission paid be the same as, or lower or higher 
than, the rate used in determining the basic salaries? 

8. What kind of a sales organization does a company 
need that sells lubricating oils and greases to retail filling 
stations, to wholesalers, to factories for the lubrication of 
their machinery, to railroads and public utilities, and to the 
operators of large fleets of motor trucks? 

What types of salesmen are needed? What training or 
education do they need? 

9. Salesman Smith receives a salary of $4,800 a year, 
plus a bonus of 2 per cent on all sales over his quota of 
$200,000 a year. What does he earn if he sells $150,000? 
$250,000? $400,000? 

The next year his quota is set at $260,000, but his salary 
is unchanged. What does he earn if he sells $230,000? $275,- 
000? $350,000? 



CHAPTER 32 
Advertising Principles and Policies 

Three methods of stimulating sales. The three prin- 
cipal methods of stimulating sales are personal salesman- 
ship, the display of the goods, and advertising. All three 
methods are frequently used by the same seller. The 
retail store, for example, sells through salespeople, dis- 
plays its goods on its counters and in its windows, and 
advertises in the newspapers and in various other 
ways. 

Why advertise? The seller may advertise because he 
can get his message to the buyers more cheaply and 
more quickly by advertising than by salesmen. It takes 
time to build a sales organization: salesmen must be 
hired and trained. A salesman can talk to only a lim- 
ited number of buyers each day. An advertising cam- 
paign, on the other hand, may cover a city, a state, or 
even the nation within a few days. Advertisements in 
newspapers and magazines are before the buyers as soon 
as the periodicals are distributed. It is doubtful if a 
new product could be distributed quickly over a large 
territory without advertising. 

Advertising goes where salesmen cannot go. Adver- 
tisements enter our homes in the newspapers and maga- 
zines and are with us at all hours. Billboards and electric 
signs confront us at every turn. Radio advertising is 
with us in much of our entertainment. Advertising can 
make more frequent calls than the salesmen. For ex- 
ample, when a salesman makes a call, if he does not se- 

512 



Advertising Principles and Policies 513 

cure an order within a reasonable time, he must go on to 
another prospect. But the advertisements are repeated 
over and over again and are with us at all times. They 
may attract our attention and secure our interest and 
perhaps our desire "when we are off our guard/' so to 
speak. 

Limitations. Advertising has many limitations. It 
lacks personal appeal. It is easily ignored. The adver- 
tisement cannot answer questions or objections. Perhaps 
the reader is not fully convinced by the advertisement 
he may be skeptical about some of the statements or 
may not fully understand the product. The adver- 
tisement gives its message and quits. A salesman, on the 
other hand, can give additional information, can an- 
swer questions, can offer proof of his statements, can 
demonstrate the product, and can answer the prospect's 
objections. The advertisement is weak on closing the 
sale. For this reason, advertising is often used to do the 
preliminary work in selling in attracting attention and 
arousing interest while salesmen are used in closing the 
sales or in actually getting the orders. 

What advertising does. Advertising may win accept- 
ance for a product. When the buyer is offered an adver- 
tised product, the name is familiar to him. He often 
renjembers seeing it advertised, and, other things being 
equal, he will usually choose it rather than a non-adver- 
tised product. 

Advertising may induce the buyer to ask for the prod- 
uct by name. The salesman, however, may not have 
the advertised product or may feel that some other prod- 
uct is better. He therefore recommends a substitute. 
If the buyer has more confidence in the salesman than in 
the advertising, he usually buys the substitute. 

Advertising may be so convincing that the buyer not 



514 Advertising Principles and Policies 

only asks for the product by name but insists on having 
it and refuses to buy a substitute. If one seller does not 
have it, he goes to another store or waits for another 
salesman to call. Advertisers would like to win the in- 
sistence of the buyers for their products. As a matter of 
fact, however, all that successful advertising usually 
does is to secure acceptance for the products. 

In selling by mail, advertising replaces the salesmen 
and induces people to buy ; it completes the sale. How- 
ever, advertising usually supplements the work of sales- 
men; it precedes them and builds interest before they 
meet the buyers. 

Cost of advertising. Advertising is estimated to cost 
a little less than two billions of dollars annually. This 
includes the various kinds of advertising, such as that 
done in newspapers, in magazines, on billboards and 
other outdoor signs, by direct-mail matter, by radio, by 
dealer helps, by want ads, by catalogs, and by novelties. 
The total volume of goods sold annually at retail was 
over 50 billion dollars in 1929, was approximately 30 
billion dollars in 1933, and is perhaps 40 billion dollars 
at this writing. Advertising is done to sell both goods 
and services. A considerable sum is spent to promote 
the sale of insurance, investments, amusements, travel, 
hotel rooms, and many different forms of personal serv- 
ices not included in the figure for retail sales. We may 
therefore estimate, in a general way, that advertising 
takes approximately three cents out of each dollar the 
consumer spends for goods and services. 

Is advertising worth its cost? Is advertising worth its 
cost to the consumers? It is argued by some that the 
money spent for advertising is largely wasted in so far 
as the consumers are concerned; that it is spent in the 
competition of rival sellers for business; and that each 



Advertising Principles and Policies 515 

seller advertises in an attempt to increase his sales at 
the expense of other sellers. We may admit at once that 
there is much waste in advertising, but so is there in all 
forms of human activity. 

It is also argued that much advertising is exaggerated 
or dishonest and makes sales by deceiving the public. 
We must admit that there is such advertising. On the 
other hand, advertising men have taken the lead in pro- 
moting "truth in advertising" and improving business 
ethics. After making allowances for boasting or "puff- 
ing," the great part of advertising today is reasonably 
honest. Advertising is more truthful than personal sales- 
manship. 

Advertising has many advantages. It has an edu- 
cational value: it teaches us much about new prod- 
ucts, sanitation, health, - and foods, and it introduces 
luxuries. It makes us want things, and we work harder 
to get them. By such work the human race has won 
much of its increased standard of living during the past 
century. Advertising also makes possible many of our 
newspapers and magazines which would not be published 
except for the revenue from advertising. 

Advertising is said to be cheaper than personal sales- 
manship. The results obtained by the 3 per cent spent 
for advertising might cost more if secured by personal 
salesmen. Many advertisements can be distributed for 
the cost of having a salesman make one call. Adver- 
tising saves the time of the salesmen, as they can usu- 
ally sell an advertised product in much less time than 
a non-advertised product. The buyers have more confi- 
dence in the advertised product, and the salesman spends 
less time in explaining its merits and giving assurances 
of its quality. 

Many advertising men argue that advertising increases 



516 Advertising Principles and Policies 

sales and so allows the manufacturer to produce in larger 
quantities and hence at a lower cost per unit. They 
argue that a part of this saving is passed on to the con- 
sumer who can get the goods more cheaply than he could 
if they were not advertised. The theory back of this 
argument is known as the law of decreasing costs. This 
is an important economic law, but its importance is 
greatly exaggerated. Nevertheless, there are some in- 
stances in which advertising has helped to reduce the 
prices to the consumers. 

The advertising policy. Advertising is a part of the 
general plan of distribution. It is not a thing apart, but 
an integral part of the concern's business policies. The 
correct advertising policy depends largely upon the 
method of distribution, the product, the territory cov- 
ered, and the size and financial strength of the seller. 

The seller must first determine whether or not he will 
advertise. If he determines to advertise, he must de- 
termine what he will advertise, how much he will spend 
for advertising, when and where he will advertise, the 
kind of advertising to be used, and whether or not he 
will use an advertising agency. He must also decide 
what use he will make of publicity. 

Deciding whether or not to advertise. Not all busi- 
nesses advertise. Some have become large and success- 
ful with little or no advertising, while others have been 
built largely by advertising. 

Method of distribution. The method of distribution 
employed will have much to do with whether or not a 
concern advertises. If a concern sells its goods under 
the private labels of distributors (e.g., wholesalers or 
chain stores), it will probably do little or no advertis- 
ing; it is usually unknown to the consumers. Some con- 
cerns distributing their products direct to the consumers 



Advertising Principles and Policies 517 

by salesmen do little or no advertising. On the other 
hand, a concern may well advertise if it identifies its 
product and has it sold to the general public. 

Some manufacturers have depended very largely on 
advertising to develop consumer demand and have made 
relatively little use of salesmen. If the consumers de- 
mand the product at the retail stores, the retailers will 
stock it, and sales become almost automatic. The com- 
pany needs few salesmen and may use brokers to sell 
the wholesalers who supply the retailers. 

Product. The advertising policy depends to a con- 
siderable extent upon the product. The product must 
be branded or identified in some other way if it is to be 
advertised, unless the advertiser sells it direct to the 
user. There must be some feature or "talking point" 
about the product if the advertising is to be successful. 

Manufacturers of raw materials have often felt that 
it was useless to advertise. Other producers had prod- 
ucts of equal quality, and they felt that the business 
went to the producer with the lowest price or the best 
service. More and more producers of raw materials, 
however, are coming to advertise. Some are identifying 
their products so that they can secure the credit for high 
quality. Others have come to realize that the demand 
for their products is elastic, and they are advertising the 
product to expand its consumption. Thus we see ad- 
vertisements of various kinds of wood, wrought iron, 
nickel, and sheet steel. These products compete with 
other products and may have their use increased by 
showing their advantages. 

In order to secure something to advertise, producers 
often develop specialties products that are different 
from other products. Thus a manufacturing company 
made screw-nails, a steel manufacturer developed a rust- 



518 Advertising Principles and Policies 

resisting iron, a can company developed flake coffee, a 
metal furniture manufacturer produced steel shelving 
that would fit together without bolts, while a glass com- 
pany introduced windows with two panes sealed together 
with dehydrated air to stop heat losses. 

Territory. The company selling in a very limited ter- 
ritory may feel that it can reach the buyers to better 
advantage with salesmen than with advertising. Such 
companies, however, often advertise in local newspapers, 
or with direct-mail matter. 

Financial strength. Small companies, or new com- 
panies started with limited capital, cannot afford large 
advertising campaigns; some of them feel that for this 
reason it is useless to advertise at all. This may be the 
wrong attitude. Many of the outstanding businesses of 
the country began advertising in a very small way, some 
when they could spare only a few dollars. Many firms 
attribute their growth largely to their advertising begun 
on a very small scale. The small concern can usually 
find some advertising method adapted to its needs a 
trade paper, local newspaper, a farm paper, direct-mail 
matter, or a novelty. 

What to advertise. The first essential for successful 
advertising is to have something to advertise. Adver- 
tising without a definite article or service to offer is 
wasted effort. We may advertise a new article, an im- 
proved article, a superior article, an attractive price, a 
definite service, or the reliability or dependability of the 
article or the seller. The buyer must have some interest 
in the product or service it must meet one of his needs 
or desires. 

If the seller has several things for sale, he must decide 
which product or service he will advertise and what 
appeal he will feature. What can he advertise to best, 



Advertising Principles and Policies 519 

advantage? What will make the best appeal to the 
buyers? What service does the product render to the 
buyer? How does it serve his needs? 

How much to spend. Some successful businesses have 
been built up on the policy of spending all that they 
could afford on advertising. This may be a good policy 
for a growing concern with a big market to develop. 
When a company becomes large, or when the market is 
covered, some other policy is usually adopted. The most 
widely used methods of determining the advertising ap- 
propriation are to base it on past or expected sales, or 
to base it on the task to be done results expected from 
the advertising. 

Sales. Some companies set aside a certain percentage 
of the past year's sales to be spent for advertising during 
the coming year. A shorter period, as a half-year or a 
quarter, may also be used. This is a very definite 
method. It affords the easiest way of determining the 
advertising appropriation. If sales vary from year to 
year, this method, however, will cause different amounts 
to be spent for advertising in different years. If the 
company has a poor year and its sales are low, the 
amount of advertising done during the following year 
will be reduced; and this reduction may be poor policy, 
for perhaps the following year will be a year when busi- 
ness is improving and the amount of advertising should 
be increased. 

A somewhat better method is to set aside for adver- 
tising a certain percentage of the expected sales during 
the coming year. This method will tend to keep the per- 
centage cost of advertising uniform. It will mean that 
more is spent for advertising when business is good than 
when business is poor. Some argue that the best time 
to advertise is when people are in a buying mood. If 



520 Advertising Principles and Policies 

this be true, then advertising may well be based on es- 
timates of future sales provided such estimates can be 
made with reasonable accuracy. 

The task to be done. Some argue that the amount of 
advertising done should vary with the job the advertising 
is expected to do. If new territories are to be opened or 
new products are to be placed on the market, then more 
must be spent on advertising. If business is poor and 
yet the company wants to keep up its volume of sales, 
it may spend more for advertising, as there is more sales 
resistance. If, on the other hand, the product is estab- 
lished on the market and no expansion of sales is 
planned, the advertising appropriation may be kept sta- 
tionary or it may be reduced. In many ways this appears 
to be the most sensible and logical way of deciding how 
much to spend for advertising. It must, however, be 
modified at times to meet the financial ability of the 
company. 

When to advertise. Some advertising men say that 
the answer to this question is "all the time." The public 
soon forgets. The seller who stops advertising often 
finds that the buyers soon forget his product and buy 
others that are being advertised. Continued, steady ad- 
vertising produces results. The amount of advertising, 
however, should often vary from one time to another. 

Seasonal products can best be advertised in their sell- 
ing seasons. When they are advertised out of season, 
some special inducement, such as low price, is usually 
necessary to induce the consumers to buy. One com- 
pany selling an anti-freeze preparation for automobiles 
arranged to place its advertising in the various cities 
when cold waves were predicted by the weather bureaus. 

When a new product is being placed on the market or 



Advertising Principles and Policies 521 

when new markets are being developed, more advertising 
is needed than when the product is established on the 
market. It is much harder to get a product on the mar- 
ket than to keep it there. 

A schedule should be prepared showing when the ad- 
vertisements are to appear. The time for each adver- 
tisement may be definitely fixed or the schedule may be 
somewhat flexible to allow for seasonal developments or 
changes in the weather. 

Advertising and the business cycle. Should advertis- 
ing be increased when business is dull in order to keep 
up sales? Or is it best to increase advertising when 
business is good and people are in a buying mood? Ad- 
vertising men differ on this question. Some argue that 
advertising can increase sales, and therefore more adver- 
tising should be done in periods of depression than in 
periods of prosperity in order to keep up sales volume. 
The majority, however, seem to feel that the best results 
are obtained in good times, when people are in a buying 
mood that it is easier to "swim with the current" than 
against it. Advertising apparently produces the best 
results when goods are in demand, when people want to 
buy. 

Whether a company curtails or increases its advertising 
in periods of depression depends somewhat on the phi- 
losophy of the manager. One man says: "Business is 
going to be poor; I had best economize and prevent 
failure." Another says: "Business is poor, but I do not 
want to go backward. Therefore I will put forth more 
sales effort in order to keep up my sales." Increased ad- 
vertising is often a part of the latter program, the success 
of which depends in part on the nature of the products 
sold and in part upon the enthusiasm and energy with 



522 Advertising Principles and Policies 

which the program is carried out. This policy may be 
helped by the fact that competitors reduce the amount 
of their advertising. 

Where to advertise. Advertising should be con- 
centrated in the territory in which the product is to be 
sold or among the customers to whom the product ap- 
peals. Mediums should be selected that cover the desired 
territory or that are read by the class of people who 
are logical prospects. Market research often shows that 
sellers try to cover too much territory that in some 
places sales are so scattered that they are unprofitable. 
Advertising should not be done in such territories, un- 
less, of course, the seller is definitely planning to develop 
such territories into profitable markets. 

Selecting the proper method. The proper method in- 
volves the selection of good mediums, good copy, and 
alluring appeals. The selection of these will be dis- 
cussed in the following chapters. 

The advertising agency. The advertising agency is a 
functional middleman which helps advertisers with their 
problems. It advises its clients as to the amount and 
kind of advertising they should do; it often conducts 
market research and prepares complete advertising plans 
for them; it prepares their copy, secures the necessary 
pictures, and has the plates made; it recommends or se- 
lects the mediums that should be used; and it buys the 
space and sees that the advertisements are published. 

The agency was formerly a space broker for the pa- 
pers, and is still paid a commission (usually 15 per cent) 
by most of the magazines and newspapers on national 
advertising. For advertisements in general mediums, 
the advertiser must pay the same rate whether or not he 
uses the agency's service. Therefore many advertisers 
turn over much of the work to the agency, and they 



Advertising Principles and Policies 523 

themselves only formulate the general policy and pass 
on the campaigns and copy prepared by the agency. 

Agencies may also be employed to handle direct-mail 
advertising or to perform extra services which are not 
covered by the commission paid by the papers and for 
which the advertiser pays the agency. 

The agency maintains a staff of specialists and is much 
better equipped to prepare good advertisements than is 
the average small seller who does not maintain a com- 
plete . advertising department. Some companies, how- 
ever, prefer to make their own plans and prepare their 
own copy. They feel that the agency does not fully un- 
derstand their problems and their products. This is 
especially true of technical products, for which reason 
the publishers of some technical papers do not allow 
agency commissions. 

Planning. The advertiser often plans his advertising 
several months in advance. Often the amount to be 
spent for advertising is determined for a six-months pe- 
riod. This amount is divided by months, and the amount 
to be spent each month is determined. Each month's 
appropriation is then divided between departments or 
products; each month's appropriation is also divided be- 
tween newspaper, direct-mail, radio, car card, trade pa- 
per, magazine, billboard, and other kinds of advertising. 
(These various kinds of advertising are explained in the 
next chapter.) Thus the amount to be spent in adver- 
tising in each department of the business, each month, 
and in each kind of medium is planned several months 
in advance. The advertiser may also select the indi- 
vidual periodicals to be used and the amount of space 
to be used in each. 

Although the advertising plans are worked out months 
in advance, they should be sufficiently flexible that they 



524 Advertising Principles and Policies 

can be changed quickly to meet changes in demand. In 
a retail store, the specific merchandise to be advertised 
may be selected only a few days in advance. This is 
often desirable because the popularity of different items 
cannot always be accurately anticipated and the store 
may want to push the sale of popular goods or to move 
overstocks. 

Chapter 32 
Review Questions 

1. What are the three principal methods of stimulating 
sales? 

2. Why do sellers advertise? 

3. What are the limitations on advertising? 

4. What advantages does a salesman have over advertise- 
ments? 

5. How may advertising influence the buyers? 

6. What is the total annual cost of advertising in the 
United States? 

7. What are the principal advantages of advertising? 

8. What are the principal objections to advertising? 

9. Is advertising worth its cost to the consumers? 

10. How does a concern's method of distribution affect its 
advertising policy? 

11. How does the product influence the advertising policy? 

12. How does the territory covered by the seller influence 
his advertising methods? 

13. How do sellers determine how much to spend for ad- 
vertising? 

14. What is meant by basing the advertising appropriation 
on the task to be done? 



Advertising Principles and Policies 525 

15. What do you think of basing the appropriation on the 
sales of the past year? On the estimated sales for the coming 
year? 

16. Which should be advertised more extensively, a new 
product or one with an established market? Why? 

17. Where should advertising be done? 

18. What is the relation of advertising to the business 
cycle? 

19. What is the advertising agency? What does it do? 
How is it paid? 

20. How should an advertiser plan his advertising? What 
is an advertising schedule? 

Thought Problems 

1. What is advertising? Should we speak of radio "ad- 
vertising" or radio "salesmanship"? 

2. What is meant by the law of decreasing costs? 

3. Sometimes we hear people say: "That's advertised 
stuff. It's no good." Do you agree? 

4. Dealers sometimes tell their customers that a non- 
advertised product is a better value than an advertised prod- 
uct, because no money has been spent for advertising it. 
Comment on this statement. 

5. What is the proper advertising policy in a period of 
depression? 

6. Should a small concern advertise? 



CHAPTER 33 

Advertising Objectives, Mediums, and 
Appeals 

Kinds of advertising. Advertising may be classified 
as to the purpose for which it is done, as to the mediums 
used, and as to the appeals employed. 

Purpose. With respect to purpose, the three major 
kinds of advertising are institutional, product, and price. 

Institutional advertising is that advertising which at- 
tempts to keep the name of a company or brand before 
the public and build goodwill for its goods or services. 
Institutional advertising is often used by manufacturers, 
retail stores, banks, and public utilities. 

Product advertising is done to promote the sale of 
particular products. It features some article such as an 
automobile, an electric fan, or a brand of coffee. 

Price advertising is that advertising which attempts 
to secure business on the basis of price. It is used by 
many different kinds of businesses; among the larger 
users are department, chain, and other kinds of retail 
stores. 

Methods of increasing sales. Advertising may have a 
number of specific purposes. Its fundamental purpose 
usually is to increase sales, but it may attempt to do this 
in a variety of ways. It may try to increase the use of 
a product by lengthening the season in which the prod- 
uct is used; thus Coca-Cola is advertised as a cold 
weather drink, and ice cream is advertised as a year 

526 



Advertising Objectives, Mediums, Appeals 527 

around food. It may be done to secure new uses for the 
product ; thus yeast is advertised as a health food as well 
as for making bread, and fans are advertised for ven- 
tilating and heating as well as for cooling. Advertising 
may be used to meet price cutting, to stabilize prices, to 
increase the size of the sale, to expose unfair practices, 
to prevent substitution, to reach markets too sparse to 
be profitably covered by salesmen, to widen markets, to 
develop new markets, or to put new products on the mar- 
ket. Advertising may attempt to influence human con- 
duct, as to get people to pay their debts, go to church, 
drive carefully, obey the law, save money, contribute to 
charity, or vote for a given candidate. 

Mediums. Advertising is often classified according to 
the mediums used in reaching the prospective buyers. 
The principal mediums are newspapers; magazines; pe- 
riodicals reaching special groups of readers, as technical, 
trade, farm, women's, and religious papers; direct-mail 
matter; outdoor advertising, such as billboards and elec- 
tric signs; radio; novelties, such as rulers, blotters, and 
calendars; dealer helps, such as cards for display in the 
dealers' stores and windows ; packages, as printed matter 
and pictures on the packages in which the goods are sold 
to the consumers; signs on delivery vehicles; and street 
car cards. 

Newspapers. If the seller desires to reach the general 
consumers in a given city or metropolitan area, the local 
newspapers appear to be the logical medium. News- 
papers in various towns can also be used in covering a 
wider area, as a certain section of the country. News- 
papers often have a lower rate per reader than do the 
magazines. They can be used to cover the territory de- 
sired and to some extent the type of people, as the dif- 
ferent papers in a city are often read by different classes 



528 Advertising Objectives, Mediums, Appeals 

of people. The advertisements in newspapers in dif- 
ferent towns can be timed to agree with the local buying 
seasons or with the activities of the salesmen in these 
towns. 

On the other hand, there are certain disadvantages to 
newspaper advertising. The newspaper is read hastily 
and thrown away. An advertisement is said to have 
less chance of being read in a newspaper than in a maga- 
zine which is kept longer and read more leisurely and by 
more people. In the past the grade of paper used by 
newspapers limited the kind of pictures that could be 
used. It has been very hard to bring out the beauty of 
products needing color or accuracy of detail in news- 
paper illustrations. This limitation is now partially 
overcome in the rotogravure sections and color pages 
used by many of the large papers. 

General magazines. Magazines of general circulation 
are most often used by advertisers of products used by 
the general public and sold over a large part of the 
country. Products not used by the general public but 
used by several different groups of buyers may at times 
be advertised in magazines of general circulation. For 
example, a product bought by contractors, carpenters, 
plumbers, and machine shops may be advertised in such 
magazines. 

Specialized periodicals. A product appealing only to 
certain groups of people is likely to be advertised in 
specialized publications. Thus, farm equipment is com- 
monly advertised in farm papers, dairy equipment in 
dairy journals, railroad equipment in railroad maga- 
zines, canner's supplies in trade papers read by canners, 
and equipment for chemical industries in the chemical 
journals. Women's magazines are used by advertisers 
of products used largely in the home, and the business 



Advertising Objectives, Mediums, Appeals 529 

papers are used by advertisers of office supplies and 
equipment. The specialized paper offers the best ad- 
vertising medium to a great many advertisers the use 
of whose products is limited to certain industries or 
trades. 

Direct-mail. Direct-mail advertising is sent through 
the mail by the seller to prospects and is not published 
in periodicals. Direct-mail matter may consist of let- 
ters, circulars, pamphlets, booklets, folders, blotters, cata- 
logs, or novelties. Direct-mail advertising can be used 
to advertise almost any goods or service. It is used to 
reach buyers of highly specialized products that cannot 
be economically reached in other ways, and it is also 
used to reach the general public. The manufacturer of 
a highly specialized machine has only a few possible 
users. He may feel that advertising even in the trade 
papers involves waste ; therefore he reaches the users by 
means of salesmen and direct-mail advertising. Such 
advertising can be controlled and used to reach the exact 
group of people who are prospective customers. Direct- 
mail matter is also often used in the sale of ordinary 
types of consumer goods (this may be done in the belief 
that it is cheaper or gets better results than periodical 
advertising), or it may be used to supplement the work 
of salesmen. 

If the mailing lists used in sending out direct-mail 
matter are compiled with enough care, the advertiser 
may reach only those people who are prospective buyers 
of his product. In this way he can control the appeals 
made to different groups. Further, his competitors do 
not know the extent of his advertising. 

Direct-mail advertising can be used very successfully 
and profitably. However, it requires the constant at- 
tention of the advertiser there are no publishers to see 



530 Advertising Objectives, Mediums, Appeals 

that his advertisements are distributed. It requires work 
to prepare the copy and mailing lists; to have the ma- 
terial printed; to see that the matter is mailed at the 
proper times; and to check up on the results obtained 
from different mailing lists, pieces of copy, and types of 
paper and printing. The results obtained from direct- 
mail advertising can be checked much more closely than 
the results of other kinds of advertising. In fact, direct- 
mail advertising can be made almost an exact science. 

The greatest objection to direct-mail advertising is 
that so much material is thrown away without being 
read that the cost of securing business in this way may 
be high. 

Outdoor advertising. Outdoor advertising on bill- 
boards, in electric signs, and on posters is very widely 
used. The consumer may refuse to read the advertise- 
ments in the papers, but some of the outdoor signs con- 
front him at every turn so conspicuously that he cannot 
help but see them. As people usually merely glance at 
outdoor signs, their messages should be brief. Often 
they consist largely of the name of a product or com- 
pany, or of a picture with the name of the product. 
Pictures are very good to visualize the product quickly 
to the passers-by. As outdoor advertising is seen by all 
classes of people, it is generally used for products gf 
general consumption, such as chewing gum, automobiles, 
gasoline, food, and amusements. It may be used by 
both local and national advertisers. 

There has been considerable agitation against outdoor 
advertising on the ground that it spoils the natural 
beauty of the country and that it increases the danger 
of driving by obstructing the view of the drivers. Out- 
door advertisers, themselves, have gone on record as 
opposing the placing of advertisements at natural beauty 



Advertising Objectives, Mediums, Appeals 531 

spots or where they interfere with views of beautiful 
landscapes, or where they increase the danger of driving. 
Nevertheless, many outdoor signs are badly placed when 
the beauty of our highways is considered. 

Radio. The radio has come to be a very important 
"advertising" medium, costing many millions of dollars 
annually. Radio advertising, or salesmanship, has many 
problems. What types of programs are best suited to 
different products? What is the value of the different 
hours? How much advertising will the listeners per- 
mit? Is it best to simply announce the name of the 
advertiser as the sponsor of the program, or can a consid- 
erable amount of advertising be interspersed with the 
entertainment? Only a limited number of broadcasting 
stations can be permitted on the air and each has only 
a limited amount of time available for advertising. 

Radio advertising appears to be especially adapted 
to sellers of products with national distribution that are 
used by the general public. It does not appear to be 
adapted to technical products with limited markets. It 
can, however, be used by local advertisers where local 
stations are available. 

Novelties. Advertising novelties, such as paper- 
weights, letter openers, watch fobs, caps, blotters, 
yardsticks, recipe books, calendars, almanacs, and ther- 
mometers, are widely used. The object is to place the 
advertising message on something of value that will be 
kept for a considerable time by the prospects. The calen- 
dar, for example, is kept for a year and is looked at fre- 
quently. Cheaper novelties are generally used for 
distribution to the general public, while the more ex- 
pensive articles go to large buyers purchasing agents 
and others in a position to place large orders. Novelties 



532 Advertising Objectives, Mediums, Appeals 

may be used by local advertisers, such as retail stores, or 
as parts of national advertising campaigns. 

Dealer helps. Dealer helps consist of cards, posters, 
display racks, and other matter for display in the stores 
and windows of the retail merchants. The chief ad- 
vantage of dealer helps is that they advertise the goods 
at the place where they are sold to the consumers. 

Dealer helps vary greatly in cost from those of moder- 
ate cost to very expensive ones. If used by the retailers, 
they stimulate sale of the manufacturer's products. The 
greatest difficulty is in getting the dealers to use them. 
Dealer helps are most often used by small neighborhood 
stores in the cities and by the stores in the small towns 
and villages. Many cards received by mail are thrown 
away without being used and many cards put up by 
salesmen are taken down soon after they leave. 

In attempting to have their material used, some sellers 
have their salesmen emphasize its importance; others 
make a small charge for it. The price does not usually 
cover its cost, but a dealer will ordinarily use what he 
buys. Some manufacturers have emphasized the dealer's 
goods in the cards and placed their own goods in the 
background in order to induce the retailers to use the 
material in their windows. 

Packages and delivery vehicles. Valuable advertising 
is obtained by the labels on goods, on the packages in 
which goods are sold, and on the vehicles of the sellers. 
The color, design, size, and shape of the package serve 
to identifiy the product when next the buyer wants to 
purchase. New users are secured by the attractiveness 
of the package. 

Delivery trucks and salesmen's cars are used where 
they are seen by many people and thus may supply a 
valuable advertising medium. 



Advertising Objectives, Mediums, Appeals 533 

Car cards. Cards in street cars and suburban trains 
are widely used in the larger cities to advertise products 
of general consumption. 

Publicity. Publicity is thought of by some as adver- 
tising that is not paid for directly. Many activities of 
business concerns have news value. The public is in- 
terested in new and improved products, and in industrial 
processes, methods, and machines. These may well find 
their way into the news columns. Some people think 
of publicity as underhanded attempts to get "inspired" 
articles or propaganda into our papers, schools, and or- 
ganizations. The author has no inteaition of defending 
such tactics. There are, however, fair methods of se- 
curing legitimate publicity. 

Many companies make a practice of showing visitors 
through their plants. This may be very excellent pub- 
licity, for the visitors usually go away with favorable 
impressions of the products and the producer. Other 
companies have liberal policies in giving the press facts 
about their business and their products. Some com- 
panies have their technical men write articles for tech- 
nical or business papers and deliver talks before schools 
and conventions; others prepare films (which are loaned 
free for educational meetings) showing the processes in 
their plants. The company with an open policy in regard 
to giving out news may secure much valuable publicity 
for itself and its product. 

Selection of proper mediums. Conditions and prod- 
ucts vary, but advertising methods can be found that 
are adapted to practically all situations. 

The neighborhood store. A neighborhood store in a 
city cannot afford to advertise in the city papers. Most 
of the readers live too far away from the store to be 
prospective customers. To advertise in the papers would 



534 Advertising Objectives, Mediums, Appeals 

mean paying for a large waste circulation. The store 
may, however, compile a mailing list of the people in its 
neighborhood and use direct-mail advertising. It may 
use handbills or novelties. It may use such outdoor 
advertising as electric signs, posters, or billboards on or 
near its store. At times neighborhood papers are avail- 
able. Cooperative advertising often enables the neigh- 
borhood stores to advertise economically in the city 
newspaper. One neighborhood store cannot afford space 
in the city paper, but if 50 or 100 stores 1 located in 
various parts of the city advertise together, the cost to 
each is relatively small. It is, of course, necessary for 
all of the merchants to carry the advertised goods at 
the advertised prices, which usually involves some agree- 
ment on buying. This form of cooperative advertising 
has had its largest growth among the "cooperative 
chains" in the grocery field. 

The village store. The local village merchant is often 
without a suitable newspaper covering his territory. He 
may use direct-mail matter and outdoor posters. A 
method that is at times very successful is for the mer- 
chant to issue periodically (perhaps weekly or monthly) 
a paper, or house organ, which he mails to the people in 
his trade territory. This paper may contain advertise- 
ments of his goods, personal news items concerning his 
customers, jokes, and other reading matter. Direct- 
mail matter may include folders, circulars, booklets, 
catalogs, and personal letters. The merchant may send 
picture postcards to all the children in the neighborhood 
when he is away on a trip. These postcards contain 
no advertising and are purely goodwill builders. One 
merchant writes personal letters to his customers at every 

1 The number of stores necessary will of course vary with the size 
of the city. 



Advertising Objectives, Mediums, Appeals 535 

opportunity. Letters of congratulation go out when the 
boys and girls graduate from high school, when young 
folks get married, when babies are born. Letters of 
sympathy go out when deaths occur. Personal sales 
letters are used more or less continuously. Purchases 
of clothing are solicited from the high school seniors 
shortly before graduation. The merchant keeps a list 
of his customers' purchases. He knows just about when 
Jones needs a new overcoat or a new suit of clothes. If 
Jones fails to come in, a sales letter is sent to him. 

The appeal. To be successful an advertisement must 
appeal to the buyer. It must interest him and show 
him why he should buy the product or service. Better 
quality, lower price, better service, longer life, greater 
safety, easier operation, a distinctive feature, or an im- 
proved method of operation may furnish an appeal. 

Buying motives. The appeal must suit the buyer. 
Advertisements should be written from the buyer's point 
of view. The buyer's interest in the advertiser is due 
solely to the fact that the advertiser has something which 
he wants. The fact that the advertiser has something 
he wants to sell is of no interest to the buyer. The fact 
that the advertiser needs money interests the buyer only 
because he is making a concession in price. It is just 
as important for the advertiser as for the salesman to 
talk from the buyer's point of view. The advertiser 
should prepare his advertising to appeal to definite buy- 
ing motives. The fundamental buying motives were 
listed in Chapter 27. 

Ordinarily it is better to make only one appeal in one 
advertisement, or to devote most of the space to one 
appeal and to mention the others more or less inci- 
dentally. 



536 Advertising Objectives, Mediums, Appeals 

Positive appeal. A positive appeal is usually better 
than a negative appeal. We like- the pleasant better 
than the unpleasant. For example, an advertisement 
showing a woman dressed in her good clothes and reading 
a book while operating a washing machine produced 
much better results than the advertisement showing a 
poorly dressed and tired woman toiling over a hot wash- 
tub. The suggestion of the hot washtub was unpleasant. 
The woman wanted the leisure. The husband wanted 
to see his wife freed from the drudgery. 

Fear. It has been said many times that the advertiser 
should not appeal to fear. Nevertheless the fear appeal 
is used in advertising many such products as insurance, 
safes, tire chains, watchmen's clocks, burglar alarms, and 
so forth. 

Buying motives illustrated. We may buy oranges be- 
cause we like them or because we think they are health- 
ful contain valuable vitamins, mineral salts, or acids. 
The appeal may be directed to any or all of these 
motives. 

The seller of correspondence courses of instruction 
asserts that his courses enable the students to secure 
better positions and increase their incomes. This is an 
appeal to gain or profit. Other motives are also used. 
The advertisement may show how the increased income 
enables the student to give his wife or children more 
comforts and luxuries, and so appeal to his affection. 
The advertisement may appeal to the student's pride 
by showing how the course of study enables him to 
secure promotion before the eyes of his present associates. 

A manufacturer of oil heaters may show a picture of 
a small, well-dressed woman with a large scoop in her 
hands shoveling black, dirty coal into a furnace. The 
caption may read: "Does your wife have to do this?" 



Advertising Objectives, Mediums, Appeals 537 

This appeal is aimed at the husband's affection. If the 
manufacturer tells how his furnace needs no attention, 
he may be appealing to the man's desire for leisure. If 
he tells how the thermostatic control gives an even heat 
at all times, he appeals to the desire for comfort and 
health. If he tells how the oil heat is cleaner than coal, 
he appeals to both affection and gain (economy). The 
wife is saved from much drudgery in cleaning, and the 
cost of cleaning, repainting, and repapering is reduced. 
If he tells how the furnace removes coal and gives a 
clean basement, he may appeal to pride, affection, or 
economy. The picture may show the proud owner show- 
ing guests his clean basement, or the lovely playroom 
for the children that can be placed in the basement. 
Such positive appeals may be better than the negative 
appeal involved in the idea of a dirty basement. 

Home ventilating fans were formerly advertised to get 
fresh air into houses or to keep them cool. Then one 
seller got the idea of advertising that they remove the 
odors from the kitchen. Here was a new appeal and one 
that was very effective with people who liked fish, corned 
beef and cabbage, onions, sauerkraut, or other foods 
with strong odors. 

The seller of mechanical refrigerators may advertise 
lower temperatures and better protection of foods. He 
may advertise that there is no iceman to make dirty 
tracks on the kitchen floor. He may show the incon- 
venience of being away when the iceman calls and so 
having no ice in the refrigerator. He may advertise 
controlled temperatures which do not vary with the 
outside temperatures and the amount of ice in the re- 
frigerator. Again, he may show the cleanliness and 
beauty of his product, and he may appeal to pride by 
showing the admiration of visitors. 



538 Advertising Objectives, Mediums, Appeals 

Chapter 33 

Review Questions 

1. What are the major purposes of advertising? 

2. For what specific purposes may advertising be done? 

3. What are the principal advertising mediums? 

4. When should the advertiser use newspapers? 

5. What are the principal advantages and disadvantages 
of newspapers as advertising mediums? 

6. What types of products should be advertised in gen- 
eral magazines? 

7. Why are specialized periodicals used? Name various 
kinds of specialized periodicals. 

8. What is meant by direct-mail advertising? 

9. What are the advantages of direct-mail advertising? 

10. What type of products can be advertised direct by 
mail? 

11. What are the disadvantages or limitations on direct- 
mail advertising? 

12. What is meant by outdoor advertising? What are its 
advantages from the advertiser's viewpoint? 

13. What types of products can be successfully advertised 
out of doors? 

14. What can you say of radio "advertising"? 

15. What are advertising novelties? Why are they used? 

16. What is meant by dealer helps? Why are they used? 

17. What problems arise in the use of dealer helps? 

18. What can you say of the value of packages for adver- 
tising purposes? 

19. Do you believe that advertising on delivery vehicles 
is valuable? 

20. What can you say of car cards as an advertising me- 



Advertising Objectives, Mediums, Appeals 539 

dium? What type of products can be advertised on car cards? 

21. What is publicity? How is it obtained? 

22. How can a neighborhood store in a city advertise at 
a reasonable cost? 

23. How may a merchant in a small village advertise if 
he does not have a newspaper covering his trade area? 

24. What is meant by the appeal in advertising? 

25. What is meant by a positive appeal? Is it better than 
a negative appeal? Why or why not? 

26. Does fear make a good appeal? Why? 

27. What should the advertiser do when his product has 
several appeals? 

28. What appeals may be used in advertising ventilating 
fans? oranges? oil heaters? electric refrigerators? 

Thought Problems 

1. Many people say that the billboards should be abolished 
to enhance the scenic beauty of the country. How about it? 

2. Do you think that novelties make a good advertising 
medium? Why or why not? 

3. What types of radio programs are most popular? 
What percentage of the time in radio programs should be 
devoted to advertising and how much to entertainment? 

4. It is said that direct-mail advertising is scientific, or 
can be made so. What is meant by this statement? Do you 
agree? 

5. Can successful advertisements be based on fear? Se- 
lect "fear" advertisements from current periodicals and tell 
which you think are good and which you think are bad. 

6. Make a list of the chief buying motives and select two 
advertisements from current periodicals that appeal to each 
motive. (Paste each advertisement on a sheet of paper and 
write the appeal below and hand in.) 

7. What appeals would you use in advertising the follow- 



540 Advertising Objectives, Mediums, Appeals 

ing products: metal furniture for the home? pre-fabricated 
houses? pancake flour? railroad passenger service? bonds? 
garden seeds? ice cream? milk? computing machines? farm 
implements? 

8. Select advertisements illustrating institutional, prod- 
uct, and price advertising. (Paste on paper and hand in as 
suggested in Problem 6 above.) 



CHAPTER 34 
Preparing Advertisements 

Attention. The first problem in preparing advertis- 
ing is to get the advertisement read, so that the message 
gets to the readers. Attention may be secured by Size, 
Position, Layout, Illustration, Headline, Color, Copy, 
and Shape. 

Size. A large advertisement will attract more atten- 
tion than a small advertisement. It is said, however, 
that the attention value of an advertisement does not 
increase in proportion to its size. Thus a half page ad 
will be read by more people than a quarter page ad, but 
it will not be read by twice as many people. 

The advertiser fixes the amount to be spent in a given 
paper during a certain period. He may decide to use a 
few large ads or several smaller ads. On a given day, he 
may use one large or several small advertisements. In 
the past many department stores have used full page 
ads. A store may, however, use several small ads to 
feature different articles rather than one large ad. The 
one large advertisement economizes on space in that only 
one signature (name) is needed, and hence a larger per- 
centage of the space can be used for illustrations and 
description of the goods. Readers attracted by one arti- 
cle may have their attention called to others. On the 
other hand, the small advertisements appear on different 
pages and in different positions and, taken all together, 
may be read by more people than the one large advertise- 
ment. 



542 Preparing Advertisements 

The size of the advertisement is often influenced by 
the kind or number of articles to be advertised and the 
appeal to be made. If a large picture or a piece of long 
copy is needed, the ad will probably be larger than if 
only a small picture or a short message is needed. In 
many instances, however, the size is first determined, and 
then the copy is prepared to fit the space. The size of 
the type may be varied to get the message into the space 
available. The advertiser must often choose between 
having his copy set in small type and shortening his 
message so that larger type can be used. The number 
of people reading the advertisement increases with the 
size of the type used. 

The majority of newspapers have a column 2 inches 
wide. Many papers have a page 8 columns wide and 
21 inches long. The size of page varies somewhat 
between papers, but a full type page of 16 1 /) x 21 inches 
is common. The extra half inch in width comes from 
the width of the seven rules (lines) separating the col- 
umns. A half page ad is thus lO 1 /^ x lO 1 /^ inches, or 
8% x 21 inches. The latter may be referred to as a four 
column ad. A quarter page ad is ordinarily 8Vi x 10% 
inches. 

Shape. The correct shape for an advertisement has 
been said to be a rectangle with a proportion of 5 to 8. 
Thus an ad 2 columns wide (4 inches) should be approxi- 
mately 6 a /2 inches long. This shape has been said to be 
best adapted to the human eye. Letterheads, books, 
and many magazines have pages of about this propor- 
tion. The ordinary newspaper page varies slightly from 
this shape, as it is a little too wide for its length. It is 
often desirable to use ads that do not have the 5 to 8 
ratio because of the shape of the illustration needed or 
to gain in attention value. If an advertisement is to 



Preparing Advertisements 543 

illustrate clothing on the human figure, a longer and nar- 
rower ad may be desirable. On the other hand, if an 
illustration of a railway train or landscape is to be used, 
a wider and shorter advertisement may be preferred. A 
long, narrow ad, perhaps one column long and one col- 
umn wide (2x21), may have excellent attention value 
because, if placed alongside reading matter, it has much 
opportunity to attract the reader's attention. 

Position. In the case of a magazine, the front and 
back covers have the greatest attention value. The in- 
sides of the covers come next. Ordinarily the publisher 
charges more for advertisements in these positions than 
for those on inside pages. 

The best position on a page is the upper left-hand 
corner, as we begin reading in that corner. The point of 
greatest eye value on a page is above and to the left of 
the center. The preferred position on a page is in the 
upper left-hand corner fully surrounded by reading 
matter. Many publishers refuse to sell this position, 
and others charge a higher rate for it. If this position 
is unobtainable, the advertiser likes a position at the 
right or bottom of the page with reading matter 
touching two sides of his ad. After this comes a position 
with reading matter on one side. The poorest position 
on a page is on the bottom or right-hand side, separated 
from reading matter by other advertisements. An ex- 
ception to this may occur in the case of advertisements 
which are in the nature of announcements. A want ad 
offering household furniture for sale may best appear 
among other ads offering similar goods. People inter- 
ested in buying second-hand furniture will be more 
likely to read the ad in this position than if placed else- 
where. The theater may want its ad among the other 
amusement ads, for a person interested in attending a 



544 Preparing Advertisements 

theater looks for the theater ads and is likely to overlook 
one appearing in another position. 

The advertiser must ordinarily take his chance of re- 
ceiving a good position or must pay a higher rate for a 
preferred position. Publishers do not like to promise 
preferred positions, as it complicates the "make-up" of 
their papers. 

The advertiser likes his advertisements to appear on 
pages with popular reading matter or with matter that 
is likely to be read by the class of prospects to whom he 
appeals. A sporting goods store wants its ad on the 
sporting page, while the investment house wants its ad 
on the financial page. 

The layout. The layout man plans the advertisement 
just as the architect plans the building; he is largely 
responsible for its physical appearance. He is ordinarily 
furnished with the size of the ad, a list of the articles to 
be advertised, the prices, the appeal, and perhaps the 
illustrations and copy to be used. His first task is to 
divide the space between the illustrations, the headlines, 
and the copy. 

He takes a piece of paper and rules it off the size and 
shape the ad is to be, and then divides the space between 
the illustrations, headlines, and copy. He plans the ar- 
rangements of the ad. He determines the size and posi- 
tion of the illustrations, the size of the type to be used 
in the headlines, the amount of white (blank) space, and 
the space and positions to be used for the copy. He 
often letters in the headlines, and blocks in the space to 
be used by illustrations and copy. He may paste copies 
of the cuts in their proper places. He thus gives the ad 
its first definite appearance. 

The layout should call attention to the message and 
get the advertisement completely read. If it calls atten- 



Preparing Advertisements 545 

tion to the layout, it is bad. 1 The advertisement should 
not be too black, rfor should it leave too much white 
space. Some layout men strive for balance. Balance 
is determined by the sizes of the various parts of the 
ad, their distance from the center, and their tone. Tone, 
for example, means that a smaller space filled with black 
faced type balances a larger space filled with light faced 
type. Some layout men emphasize eye direction the 
reader's eye is directed from point to point in the ad in 
the order in which the advertiser wants his message read. 
The eye may be directed by the position of the illustra- 
tions, by the armngement of the headlines and copy, or 
by lines or arrows. 

Illustration. Pictures are the universal language. 
They are often the most important part of an advertise- 
ment. A suitable picture gives the reader the idea at 
a glance. It requires very little mental effort to look at 
and understand the ordinary picture. On the other 
hand, it does require mental effort to read and under- 
stand copy. A picture makes an idea clearer than a long 
description. Even a well-written description may give 
the reader only a hazy idea of a machine, a building, or 
a new product, but a picture or diagram of the product 
gets the idea over much more quickly and accurately. 
The picture of the neat little woman shoveling dirty coal 
into a furnace got the idea over much better than it 
could have been done by words alone. 

The use of pictures is limited by the fact that many 
products are so well known that their pictures no longer 
give information or attract interest; that the buying 



1 The author is indebted to Robert Martin, art director of R. H. 
Macy & Co., for some of his points of layout and illustration. See 
his article "Layout and Art," in "Retail Newspaper Advertising/* 
published by The New York Times. 



546 Preparing Advertisements 

motives are hard to picture ; and that it is hard to repro- 
duce fine pictures in newspapers. Coal, lumber, potatoes, 
cornflakes, and bread are so familiar that their pictures 
attract little attention. They are used in advertisements 
perhaps as much for identification as for any other 
reason. 

Securing illustrations. Illustrations may be obtained 
from drawings or photographs. There are many kinds 
of drawings, adapted for different products and for mak- 
ing different kinds of cuts. For newspaper advertise- 
ments, the simple line drawing is best. From this a 
zinc etching is made. This prints well on the kind of 
paper and with the ink used by newspapers. The disad- 
vantage of the line drawing is that it cannot show 
details; the fine texture of fabrics is entirely lost in such 
drawings. Photographs have many advantages. They 
show the details, and they are accurate and convincing 
"The camera never lies." On the other hand, they 
involve expense for retouching and engraving and often 
do not show up well when reproduced in newspapers. 

The advertiser may employ an artist to make drawings 
if no one on his staff is capable. He may take the photo- 
graphs himself, employ a professional photographer, or 
purchase suitable photographs from companies that 
supply photographs for advertisements. These concerns 
may use professional actors to pose for the photographs. 
If an advertising agency is used, a part of its work is to 
secure the illustrations. 

In practice, the individual advertisers often secure 
their cuts from the manufacturers of the products adver- 
tised, from companies in the business of supplying cuts, 
or from the newspapers who subscribe to mat services. 

The headline. The purpose of the headline is to catch 
the reader's eye, attract attention, and get the advertise- 



Preparing Advertisements 547 

ment read. One writer 2 says that the three best types 
of headlines are: first, those that appeal to the reader's 
self-interest offer him something he wants; second, 
those that give him news; and third, those that arouse 
curiosity. 

This headline appeals to the reader's self-interest: 
ANOTHER $100 RAISE 

This headline gives news : 

NEW FEATURES ON THE BLANK CAR 

These headlines arouse curiosity : 

WHAT'S WRONG WITH THIS PICTURE? 

THE TROUBLE WITH MANY MARRIED 
MEN Is. ... 

An insurance company tried these two headlines: 

HERE'S ONE QUESTION You SHOULDN'T 

ASK YOUR WIFE: 

You CAN LAUGH AT MONEY WORRIES IF 
You FOLLOW THIS SIMPLE PLAN 

The second advertisement secured twice as many in- 
quiries and sold four times as much life insurance as the 
first one. By merely reading the headline and name in 
the second advertisement, the reader learns that the 
Blank Life Insurance Co. has "a plan that will enable 
him to end money worries," Headlines that make an 
offer get a message over to those who read only the head- 
lines. 



3 Caples, John R., in Advertising and Selling, June 25, 1930. 



548 Preparing Advertisements 

Color. Color is of great value in attracting attention. 
Bright colors attract attention more readily than dull 
colors. The contrast of almost any color on the ordinary 
black and white page, however, attracts attention. Color 
is also of great help in illustrating many products, espe- 
cially products with distinctive colors, such as oranges, 
roofing, textiles, garments, floor coverings, and automo- 
biles. The attractiveness of many products is greatly 
enhanced by illustrating them in their real colors. Con- 
sider, for example, the illustration of a dress in black and 
of the same dress in its true colors. Colors may also be 
used to suggest the product sold. Thus red is used in 
advertising heating devices, green for cooling products, 
and yellow for gala occasions. 

The principal limitations on the use of color in adver- 
tising are its added cost and the fact that it is not avail- 
able in many newspapers. To secure the desired results 
often requires three or more colors and a high grade of 
paper. This means greatly increased costs. If possible, 
the advertiser should keep records of the results obtained 
from black and white and color advertisements, and 
determine whether or not the use of color is profitable. 
This is easily done by mail-order sellers and can be done 
in other forms of advertising by the use of "test" ads. 

Copy. Copy is that part of the advertisement involv- 
ing the use of words. It includes the text or message 
and also, strictly speaking, the headline. Often the lay- 
out is made and then the copy is written to fit the space ; 
for example, the layout man may say that a certain 
article must have a headline of 50 letters and a message 
of 100 words. The copy writer naturally objects that it 
is very hard to tell the story or describe an article in 
a definite number of words. It may be remarked, how- 
ever,, that the poet and the music composer must also 



Preparing Advertisements 549 

write to very definite specifications. 3 At other times the 
copy may be written first and the size of the ad and its 
layout adapted to the copy. This method allows the 
copy writer a freer hand in developing the theme or sales 
talk. 

To write good copy, one needs to be familiar with the 
merchandise and with the attitude of the buyers. The 
buyers are interested in facts. The copy writer, there- 
fore, needs to study the goods, to find out the pertinent 
facts about them, to find their talking points or appeals, 
and to put this information and the prices in the ad. In 
a large store, the main facts about the goods are sent to 
the advertising department by the sales departments. 
The copy writer, however, often needs to know more 
about the goods, and hence must study the merchandise 
sold by the store. 

The copy writer needs to know the consumers, for the 
copy should be written from their point of view. The 
copy writer should study the consumers and associate 
with them as much as possible. He should be able to 
reflect the "spirit of the times." Most retail adver- 
tising is read by the women, and so the copy writer 
needs to understand the woman's point of view. For 
this reason women are often employed as copy writers. 
If the goods are bought by farmers, the copy should be 
written from their point of view. If the goods are bought 
by mechanics, the copy should be written for them. 

Writing copy. The same rules of grammar and rheto- 
ric apply in writing advertising copy as apply in writing 
other material. The writer should have something to 
say and should then proceed to say it in a way that will 



3 Swensen, Dorothy E., Advertising Mamager of Abraharfl & Straus, 
Inc., in "Retail Newspaper Advertising," published by The New York 
Times. 



550 Preparing Advertisements 

interest his readers. The language should be simple, 
clear, and adapted to the readers for whom it is intended. 
Short sentences are usually best. Most of the sentences 
should be under 17 words in length. On the other hand, 
a large number of consecutive sentences less than ten 
words in length makes the copy monotonous, especially 
if the copy is long. The style must be adapted to the 
education and intelligence of the readers for whom it 
is intended. 

Short and simple words are preferred. Hotchkiss says 
that words should be correct, should be correctly used, 
should be simple, should be exact, should be euphonious, 
should have the proper degree of dignity, and should 
have the right atmosphere. It is often impossible to 
secure a word that meets all of these requirements. One 
requirement may have to be sacrificed to get a word that 
meets the other requirements. Slang should be avoided, 
and yet a slang word may sometimes be used because 
it expresses the idea to a certain class of people. A 
French word may be used in advertising toilet prepara- 
tions to secure the proper atmosphere, even though it 
is not a simple word nor generally understood. 

A few examples. The advertisement reproduced as 
Illustration A appeared in a magazine read by adver- 
tisers. The headline tells us that "Oakland Women Are 
Spenders." This means that Oakland would be a good 
place to advertise. The signature at the bottom of the 
ad stands out and tells the reader how he can reach 
these women. The ad makes a somewhat unique use 
of a border. One adverse criticism of the typography 
of the ad is the fact that the names of the towns where 
the representative has offices are .so large that the name 
of the representative does not stand out as it would if 
smaller type had been used for the names of the towns. 



OAKLAND TL J 

not mean 
they are wastefully ex ' 

travagant, but does mean 
that in department, dry 
: goods and vaViety stores, 



they annually expend a sum exceeding 
$35,800,000, according to the United 
States Department of Commerce. 

Of this large total, $32,OOO,OOO is 
spent for purchases made in the 
department stores, while $3,7OO,OOO 
goes to dry goods, general and variety 
stores. 

Local merchants have found it profitable 
to concentrate their sales efforts in The 
TRIBUNE. National distributors find it 
good policy to follow their example. 



National Advertising Representatives: 

WILLIAMS, LAWRENCE t* CRESMER CO. 

Los Angeles San Francisco New York 

Chicago Seattle 



Illustration A 

551 



552 



Preparing Advertisements 



Those interested sufficiently could be depended upon 
to read the address in smaller type. The three sentences 
average over 25 words; perhaps the class of readers jus- 
tifies sentences of this length. 



Q! 

C^S 



Ol 




NO! 

YOU ARE NOT 

planning an extravagance, when you 
plan your New York trips in terms of 
The Waldorf-Astoria. Everything has 
been lifted to a new high except the 
rates, and those start where they did 
in the oltf Waldorf ... $6 the day. 



Illustration B 

The advertisement reproduced as Illustration B is en- 
closed with a black border and has sufficient white space 
to attract attention. The heading appears perpendicu- 
larly on the page. This is done to attract' attention by 
the novelty of the arrangement. Is this a desirable lay- 



value, satisfaction plus liberal accommodations 




and 

BRUCEWOOD SHOES 

reduced for stock 

adjustment to 




It's very rarely we reduce our fine stocks 
of women's shoes, but when we do it 
means phenomenal savings. There's a 
vast selection in all styles and all sizes but 
not every style in every size our own 
regular $6.50 and $7.50 shoes reduced 
to $4.95 

TOMORROW AT 8:45 

Maurice L Rothschild 

State at Jackson 



Illustration C 
553 



554 



Preparing Advertisements 



out? Do the stars add anything to the advertisement? 

The advertisement shown as Illustration C occupies 

2 columns by approximately 8 inches. The large type 

tells us that reduced prices are offered on shoes at 




ilftlj; 
! / '; 

; 

tit' for i , ' 
;, : . .; v; 

III b 'big 

'r.'^if I 

'^jiL^s^i^' 
^ 

v x^L^Lkll:^.,.'. L,. 1 : fcii!^' & -i.u ' i " ito*^ ' w/i) 



DIEBOLD 

For 



Illustration D 




HEADQUARTERS 

FOR 
SUCCESS 

Successful business men ap- 
preciate the need for modern 
comfort and convenience 
when they travel. And so, al- 
most invariably, they stop at 
The Benjamin Franklin when 
in Philadelphia For The 
Benjamin Franklin is Phila- 
delphia's modern and con- 
venient hotel. 1200 big com- 
fortable rooms. Food that 
tempts the most travel-har- 
assed appetite. Service that 
soothes travel-jarred nerves. 
Rates that fit every travel 
budget, as low as $3.50 a day 
Try The Benjamin Franklin 
yourself the next time! 

THE 

BENJAMIN 
FRANKLIN 

SAMUEL EARLEY, Managing Director 

PHILADELPHIA 




Here you 
are, men! 
Here is 
a real drink I 

It's India Tea! 
And please, don't 
confuse it with 
ordinary tea. It's 

different! Decidedly so! It's none of 
those weak, watery drinks. It's a bev- 
erage with "heft". . . with full, rich flavor 
and satisfying strength. 

India grows the finest tea in the world. 
India Tea, piping hot, is one of the 
world's finest drinks. 

At luncheon, ask for India Tea.;. and 
to be sure you get the genuine, look for 
the Map of India trademark (above) on 
the tag on the teaball served to you. 
At home, ask the little manager to serve 
India Tea. Tell her (if she doesn't already 
know) to look for the Map of India on 
the label of every package of tea she 
buys. It certifies the genuine! 



Illustration E 



Illustration F 



555 



556 



Preparing Advertisements 



Maurice L. Rothschild's. This is a price advertisement. 

Do you feel that it is neat for a price advertisement? 

Is there plenty of white space? What do you think of 

the choice of words? 
The advertisement reproduced as Illustration D 

appeared in a magazine which is read mainly by well- 
educated people. The un- 
usual heading attracts at- 
tention. Curiosity as to 
who is making a quick get- 
away with a gun in his 
hand prompts us to read 
the copy. The advertise- 
ment uses a novel idea of 
selling safes by addressing 
the messages to robbers. 
The copy contains five sen- 
tences with a total of 75 
words, or an average of 15 
words each. The length 
varies from 27 words in the 
first sentence to 5 in the 
last. Is the first sentence 
too long? Note the choice 
of words and how the words 
in the first sentence blend 

Illustration G with the headline 

Illustration E shows another hotel advertisement. 
This is a single column ad from a popular magazine. 
It makes an appeal to success, implying that if you stop 
at this hotel you will .associate with successful people 
and gain prestige. It uses some long words, but as it 
does not appeal to the ignorant and uneducated, this 
is probably not a disadvantage. What do you think 



type 

is like a violin. In the 
hands of the master it 
becomes a singing, sen- 
sitive thing. It hums 
with color. It sparkles 
with life. Our friends 
have often called us 
Masters of Type. 

Louis A.UEPIS, INC. 

Fine Typography 




228 E. 45th St., New York 

VAnderbilt 3-8874 



Preparing Advertisements 557 

of the following phrases: "travel-harassed appetite" and 
"travel- jarred nerves"? 

Illustration F is a single column advertisement pre- 
sented for its copy. The trademark appears prominently 
so that the reader knows at once that the ad is about 
India tea. Next is a picture of a man. Women are 
supposed to be the principal tea drinkers. This ad is 
addressed to men for the purpose of inducing them to 
drink tea. Do you feel that the copy will secure action? 

Illustration G is reproduced as an example of copy. 
The seven sentences average less than seven words each. 
What do you think of the choice of words? 

Chapter 34 

Review Questions 

1. How may an ad secure attention? 

2. What are the relative advantages of using one large ad 
as contrasted with using the same amount of space for several 
small ads? 

3. What factors influence the size of an ad? 

4. What has been said to be the correct shape for an ad? 
Why are ads of other shapes used? 

5. What is meant by the position of an ad? What is the 
best position in a magazine? In a newspaper? 

6. What position would you want for a small ad offering 
a house for rent? 

7. What is meant by layout? How does the layout man 
plan the appearance of an ad? 

8. What is meant by balance in an ad? By eye direction? 

9. What is the value of pictures in advertisements? 

10. What limits the use of pictures in advertisements? 

11. What kind of illustrations are best for newspapers? 



558 Preparing Advertisements 

12. How does an advertiser secure illustrations for his ads? 

13. What is the purpose of the headline? What are the 
best types of headlines? 

14. What is the value of color in advertising? 

15. What limits the use of color in newspaper advertising? 
In direct-mail advertising? In magazine advertising? 

16. What is meant by copy? 

17. Should the copy be written before or after the layout 
is made? 

18. What are the qualifications of a good copy writer? 

19. What rules should be followed in writing copy? 

Thought Problems 

1. How can an advertiser determine whether it is worth- 
while to pay for preferred positions? For color? 

2. Clip advertisements from current newspapers or maga- 
zines illustrating a good use and a poor use of each of the 
following: layout; illustration; color; headline; copy. 

3. Prepare the copy and make the layout for the follow- 
ing advertisements to appear in newspapers: 

(a) A new arrival of fashionable men's oxfords to be sold 
at $6.50. (Size: 2 columns by 9 inches.) 

(b) Baseball equipment to appear in the early spring. 
(Size: one quarter page.) 

(c) Fishing tackle and supplies to appear during the 
summer vacation. (Size: 27 column inches.) 

(d) A clearance sale of ladies' winter coats, marked down 
from $45 to $22.50. (Size: not to exceed one-half page.) 

(e) Electric fans. Ad to be prepared in advance and 
run during the first heat wave of summer. (Size: 2 columns 
by 6 inches.) 

(f) A special sale of ladies' dresses, special value on a 
new purchase, to be sold at $17.50. .(Size: one-quarter page, 
any shape.) 



Preparing Advertisements 559 

(g) A spring ad of seeds and garden supplies, to appear 
in a small town paper. (Size: not to exceed 28 column inches.) 

4. Prepare direct-mail advertising for the following prod- 
ucts : 

(a) A leather handbag at $7.95. 

(b) Real old-fashioned hickory-smoked Virginia hams, 
cured and offered for sale by a farmer in Virginia. 

(c) Genuine Vermont maple syrup offered for sale by an 
association of producers. 

(d) Saturday specials of a neighborhood grocery store. 

5. What position in a daily newspaper would you want 
for an ad offering a cookbook for sale? What position 
would you want for an ad of golf clubs? For an ad of 
groceries? 



CHAPTER 35 
Business Ethics 

Business ethics defined. By business ethics is meant 
the application of the basic principles of right action 
to business relations; in other words, the application of 
the Golden Rule to business. 

Improvement in ethical standards. There have been 
times when the ethical standards of business were very 
low. For centuries traders were thought of as cheaters. 
It was supposed that in a trade one party had to cheat, 
or get the better of, the other party. As recently as 35 
years ago, adulteration of goods was said to have been 
very common. 

Business is now recognized as a thoroughly honorable 
vocation. It is now recognized that both parties can 
and usually do gain in a trade. It is only those trans- 
actions in which both parties do not gain that are to be 
condemned. 

A great improvement in business ethics, particularly 
during the past quarter of a century, has taken place. 
Some of the evidences of an improvement in ethical 
standards are the high degree of honesty in advertising; 
the right of the buyer to return goods; the "customer is 
always right" attitude and the one-price policies followed 
by many retail stores; and the relatively small amount 
of adulteration in advertised and branded goods. 

John Wanamaker in the operation of his stores in 
Philadelphia and New York was one of the leaders in 
improving the standards of business practice. His state- 
sec 



Business Ethics 561 

ment in regard to ethics is therefore interesting. "The 
temptations of business are great, and unless a merchant 
has more than a creed or the ordinary groundwork of 
honesty and faithfulness, he may be caught by the 
sudden wind of plausible opportunity and tumble over 
the precipice and be ruined. ... I am glad to stand 
up and say that religion is the only investment that 
pays the largest dividend possible to receive/' 

A great many business men are honest and conduct 
their businesses on high ethical planes. There are 
some, however, who are unscrupulous and dishonest and 
who try to take advantage of both their customers and 
their competitors. It is often very hard for honest men 
to meet such competition without resorting to dishonest 
practices, and many business men who really want to 
conduct their businesses along honest lines feel that they 
must be dishonest in order to stay in business. It is, 
for this reason, especially desirable that rules and agen- 
cies be established to restrain the dishonest and un- 
scrupulous and force them to behave or quit business. 

Need for rules and umpires. Business needs rules 
just as much as football and baseball. Business ethics 
and codes of fair and unfair practices give a list of rules 
for fair and honest business conduct. Business needs 
umpires to enforce the rules just as do ball games. We 
are continually striving to introduce into business a 
spirit of sportsmanship. We are hoping to change the 
motto that "business is business/' which is ordinarily 
understood to mean that anything is fair in business, to 
a feeling that business should be conducted according 
to the highest principles of truthfulness and honesty. 

Agencies. The work for higher ethical standards in 
business has been promoted by several different kinds 
of organizations. First, there are organizations of busi- 



562 Business Ethics 

ness and professional men, such as trade associations, 
professional societies, chambers of commerce, advertis- 
ing clubs, and service clubs, such as Rotary, Kiwanis, 
and Exchange. Second, there are the Better Business 
Bureaus. Third, there is the Federal Trade Commis- 
sion, an independent commission of the national Gov- 
ernment in Washington. These agencies, working under 
the supervision of the courts, may be called the umpires 
of business. 

Codes of ethics. The organizations of business and 
professional men carry on agitation and education for 
the promotion of better ethics. A common practice is 
for them to meet in conventions and draw up and adopt 
codes of ethics which set forth the practices which they 
consider ethical and those which they consider unethi- 
cal. Although codes of ethics are often violated, they 
seem to do much good. Many people will follow them, 
and they afford the opportunity for publicity and call 
the attention of the men in the trade to the practices 
considered wrong. Public opinion in the trade can ac- 
complish much. Control of business practices by the 
men in business is referred to as self -regulation. 

As a rule, we think of ethics as setting a standard of 
conduct higher than that required by law. A man who 
obeys the law is a law-abiding man, it is true, but an 
ethical man does more. He lives up to standards of 
conduct higher than those contained in the law. 

A danger of codes of ethics drawn up by men in a 
trade is that they will attempt to prohibit certain prac- 
tices which may appear to them as unfair but which may 
be in the interest of the public. 

The following is the code of ethics adopted by the 
Chamber of Commerce of the United States of America 
to regulate business conduct : 



Business Ethics 563 

I. THE FOUNDATION of business is confi- 
dence, which springs from integrity, fair dealing, 
efficient service, and mutual benefit. 

II. THE REWARD of business for service 
rendered is a fair profit plus a safe reserve, com- 
mensurate with risks involved and foresight exercised. 

III. EQUITABLE CONSIDERATION is due 

in business alike to capital, management, employes, 
and the public. 

IV. KNOWLEDGE thorough and specific 
and unceasing study of the facts and forces affecting 
a business enterprise are essential to a lasting indi- 
vidual success and to efficient service to the public. 

V. PERMANENCY and continuity of service 
are basic aims of business, that knowledge gained 
may be fully utilized, confidence established and 
efficiency increased. 

VI. OBLIGATIONS to itself and society 
prompt business unceasingly to strive toward con- 
tinuity of operation, bettering conditions of employ- 
ment, and increasing the efficiency and the 
opportunities of individual employes. 

VII. CONTRACTS and undertakings, written or 
oral, are to be performed in letter and in spirit. 
Changed conditions do not justify their cancellation 
without mutual consent. 

VIII. REPRESENTATION of goods and serv- 
ices should be truthfully made and scrupulously 
fulfilled. 

IX. WASTE in any form, of capital, labor, 
services, materials, or natural resources, is intol- 
erable and constant effort will be made toward its 
elimination. 

X. EXCESSES of every nature, inflation of 
credit, over-expansion, over-buying, over-stimulation 
of sales, which create artificial conditions and pro- 
duce crises and depressions are condemned. 



564 Business Ethics 

XI. UNFAIR COMPETITION, embracing all 
acts characterized by bad faith, deception, fraud, or 
oppression, including commercial bribery, is waste- 
ful, despicable, and a public wrong. Business will 
rely for its success on the excellence of its own 
service. 

XII. CONTROVERSIES will, where possible, 
be adjusted by voluntary agreement or impartial 
arbitration. 

XIII. CORPORATE FORMS do not absolve 
from or alter the moral obligations of individuals. 
Responsibilities will be as courageously and con- 
scientously discharged by those acting in representa- 
tive capacities as when acting for themselves. 

XIV. LAWFUL COOPERATION among busi- 
ness men and in useful business organizations in 
support of these principles of business conduct is 
commended. 

XV. BUSINESS should render restrictive legis- 
lation unnecessary through so conducting itself as 
to deserve and inspire public confidence. 

Better Business Bureaus. Some fifty Better Business 
Bureaus have been organized in various cities throughout 
the country, with a national bureau in New York. They 
are organized and financed by the business men to pre- 
vent deceptive and fraudulent advertising and to fight 
fraudulent business schemes of all kinds. These bureaus 
try to work with business men and to correct false ad- 
vertising and unethical practices by advice. Thus if a 
dealer advertises all-wool suits for $15 when the suits 
are not all wool, the bureau tries to induce him to correct 
his advertising. If he refuses, the bureau may have a 
warrant issued and prosecute him under the laws of the 
state. 



Business Ethics 565 

The bureaus warn the people about fraudulent 
schemes and salesmen. Many types of fraudulent 
schemes, which take from the people hundreds of millions 
of dollars annually, are in use in the country. Among 
such schemes may be mentioned fake stock promotions, 
fake collection schemes, sales of goods alleged to have 
been smuggled into the country, and fake bankruptcy 
and fire sales. The bureaus prosecute many of the pro- 
motors of such schemes when they operate outside the 
law. 

Statutes against false advertising. A great many of 
the states have passed laws making false advertising 
illegal. The laws are often referred to as "Printers' Ink 
statutes" because the magazine Printers' Ink took the 
lead in fighting for such laws. Under the "model" 
statute which is in force in many states, any advertise- 
ment which contains a false statement is illegal, and 
the advertiser is liable for fine and imprisonment. This 
law places on the advertiser the responsibility of know- 
ing that his advertising is truthful and contains no 
falsehoods. 

The enforcement of this law is presumably the duty 
of the prosecuting attorneys in the various counties. As 
a matter of fact, these attorneys are often so busy with 
other duties that they have little time for watching ad- 
vertisements for untruthful statements. For this reason, 
the Better Business Bureaus often take the lead in se- 
curing evidence and in providing lawyers to prosecute 
those advertisers who will not voluntarily reform. 

Advertisers in the lead. Advertisers have taken the 
lead in having laws passed making untruthful advertis- 
ing illegal, and in establishing and supporting the Better 
Business Bureaus. Leading advertisers realize that if 
advertising is dishonest people will not believe it, and 



566 Business Ethics 

it will lose its effectiveness. The truthful advertiser 
would suffer with the untruthful. Advertisers realize 
that "honesty is the best policy." 

Federal Trade Commission. The demand for better 
practices in business had become so strong by 1914 that 
Congress passed a law establishing the Federal Trade 
Commission. The Commission strives to prevent unfair 
practices and to bring about higher ethical standards in 
business. Its jurisdiction is limited to cases involving 
interstate commerce (the transportation of goods across 
state lines). Anyone may call a case of unfairness to 
the attention of the Commission. The Commission will 
investigate the case, and, if the facts warrant, a complaint 
will be issued. The accused then has an opportunity to 
present his side of the matter. If after trial the Com- 
mission feels that the accused is guilty of unfair compe- 
tition, it orders him to cease and desist from such 
practices. Appeals from the decisions of the Commission 
may be made to the higher Federal courts. 

Trade practice conferences. The Trade Commission 
tries to prevent unfair practices by inducing business 
men to follow ethical practices voluntarily. The men 
in a trade often meet with a representative of the Com- 
mission, discuss the practices in their trade, and draw up 
codes of ethics or practices which they agree to observe. 
This code is submitted to the Commission, which endorses 
those parts condemning illegal practices. The Commis- 
sion undertakes to enforce these rules against all persons, 
regardless of whether or not they were present at the 
meeting or agreed to abide by the code. These meetings 
are called trade practice conferences or submittals. 

Unfair competition. No exact legal definition has 
been given of unfair competition. Congress, in estab- 
lishing the Trade Commission, merely stated "that 



Business Ethics 567 

unfair methods of competition in commerce are hereby 
declared unlawful. The commission is hereby empowered 
and directed to prevent persons, partnerships, or corpo- 
rations from using unfair methods of competition in 



commerce." 



Unfair competition is dishonest, illegitimate, im- 
proper, inequitable, or unjust methods or practices used 
in competing for business. The Pan-American Trade- 
mark Conference defined it as "every act or deed contrary 
to commercial good faith or to the normal and honorable 
development of industrial and business activities." 

Practices declared unfair. Many practices have been 
declared unfair under the Federal Trade Commission 
Act and under the common law. Some of the more im- 
portant unfair practices are: deception of customers by 
false statements; misbranding of goods; commercial 
bribery; resale price maintenance 1 ; trade boycotts; price 
cutting to drive out competitors; price agreements among 
competitors; bribing employees of a competitor; entic- 
ing competitor's employees to break their contracts for 
purpose of injuring the competitor; misad justing ma- 
chines sold by competitors; destroying or removing a 
competitor's advertising; exclusive contracts under which 
the customer agrees not to handle the goods of other 
sellers; disclosing trade secrets acquired by employees; 
threats of patent suits made to frighten away customers ; 
and use by monopolies of concealed subsidiaries which 
are represented as being independent. 

Deception of buyers. Business ethics and law have 
progressed to the point where we may say that any 
method of deceiving the buyers is unethical or unfair. 
The buyers may be deceived by false or misleading 
statements in advertisements or sales talks; by secret 

1 Several states have recently legalized this practice. 



568 Business Ethics 

adulteration; by misbranding ; by untruthful labels; by 
selling rebuilt machines as new machines; or by simula- 
tion of names or slogans. The old motto "let the buyer 
beware" has changed to "tell the truth and protect the 
buyer." 

It is deceptive to advertise part silk hosiery as "silk" ; 
to say that part wool blankets are all wool; to sell ma- 
hogany veneered furniture as "mahogany"; to sell cigars 
made in the United States of domestic tobacco as Ha- 
vana cigars; to sell furniture made in Indiana as "Grand 
Rapids" furniture; to display coats made of muskrat fur 
as genuine sealskin coats; to advertise furs made from 
rabbit pelts as beaver; to say that an article is given free 
when it is necessary to buy another article to obtain the 
article advertised as "free"; to change the labels on goods 
and sell them as goods of other producers when done 
without the permission of the owner of the original la- 
bels; to advertise that the seller manufactures his own 
goods when such is not the case; and to sell soap as 
"Naphtha" when it contains only a small fraction of one 
per cent of naphtha. Many of these things are done, but 
they are unethical and most if not all of them are il- 
legal. 

The Winsted Hosiery Case, decided by the United 
States Supreme Court, shows how careful the seller must 
be in truthfully describing his goods. The Winsted 
Hosiery Company manufactured and sold underwear 
that it called "natural meriono," "gray wool," "Australian 
wool," or "natural worsted." None of the garments were 
all wool and some contained as little 10 per cent wool. 
The company defended the practice on the ground that 
the terms used were trade terms and did not lead the 
dealers to believe that they were buying all-wool gar- 
ments. In other words they contended that the terms 



Business Ethics 569 

had been in use so long that they no longer carried the 
normal meaning of the words and that they were under- 
stood by men in the trade to denote the kind or quality 
of garments which they were used to describe. The Su- 
preme Court, however, did not agree with the company's 
contention. It held that the labels were false and that 
they deceived the buying public. The Court said: "The 
fact that misrepresentation and misdescription have be- 
come so common in the knit underwear trade that most 
dealers no longer accept labels at their face value does not 
prevent their use being an unfair method of competition. 
A ?nethod inherently unfair does not cease to be unfair 
because those competed against have become aware of the 
wrongful practice." 

To illustrate the simulation of names, suppose that 
Johnson has made and sold "Nutak" for years. Now sup- 
pose that Edwards enters the market with a similar prod- 
uct which he calls "Newtak." If Johnson can show that 
Edwards is deceiving the buyers, who think that they are 
buying "Nutak," he can be restrained under the law. 

Commercial bribery. Commercial bribery consists in 
giving gifts for the purpose of making sales to buyers who 
are acting as agents and who accept these gifts without 
the knowledge and consent of their employers. Small 
and inexpensive things like blotters, calendars, paper- 
weights, and cigarettes are considered as advertising me- 
diums or as ordinary courtesies and not as gifts. 

Commercial bribery is unethical and unfair because the 
buyer may be influenced by the gifts and make purchases 
that are not in the interest of his employer. He may pur- 
chase goods of poorer quality or pay higher prices than 
he could obtain from other sellers. He is spending an- 
other's money and tries to profit at the expense of his 
principal. Commercial bribery increases the cost of sell- 



570 Business Ethics 

ing and hence the cost of the goods to the consumers. 

The seller may use goods or money as bribes. Goods 
are more frequently used for the reason that more buyers 
will accept goods than will accept money. The buyer 
who accepts money knows that he is dishonest, while the 
buyer who accepts goods or entertainment may persuade 
himself that the articles and entertainment are tokens of 
the seller's friendship and esteem. Gifts are often sent 
to the wives and children of purchasing agents. 

The giving of gifts has been a very common practice. 
One company with eleven salesmen spent nearly $6,000 
for Christmas presents for buyers. 2 In other cases gifts 
and entertainment cost as much as five per cent of sales. 
The practice is so common that it is hard to stop. The 
Federal Trade Commission has taken an active stand 
against commercial bribery. The National Association of 
Purchasing Agents has gone on record as opposed to it and 
objects to purchasing agents accepting gifts from sales- 
men. Some cases have been taken to court and declared 
illegal. In a recent case, a Federal court enjoined a var- 
nish company from giving or offering to give gifts secretly 
to customers or prospective customers to influence their 
purchases without the knowledge and consent of their 
employers. In another case, a state court punished a 
clothing buyer for taking bribes from the manufacturers 
from whom he purchased clothing. 

Bonuses to buyers' salesmen. Some sellers make a 
practice of offering bonuses, prizes, or presents to the 
salesmen of their customers to induce the salesmen to 
push the sale of their goods. This influences the sales- 
men to push the sale of these products whether or not 
they are in the interest of the consumers or of their em- 
ployers. Salesmen are working for their employers and 

2 Printer's Ink, Sept. 5, 1925. 



Business Ethics 571 

not for the sellers from whom their employers purchase 
the goods. Merchants who allow their salesmen to ac- 
cept bonuses from the makers of the goods thereby lose 
part of their control over their men; for this reason, the 
value of the practice is very doubtful. The practice is 
unfair if done without the knowledge and consent of the 
employers of the salesmen. The practice has been de- 
nounced by the Federal Trade Commission and by sev- 
eral trade organizations. 

Prices. Several practices relating to prices are unfair. 
Price agreements among competitors are, of course, un- 
fair and illegal, regardless of the form they take. 

Competition on prices is at the very center of the com- 
petitive system. Nevertheless, price cutting may be un- 
fair under certain conditions. If one company sells below 
its cost of production for the purpose of putting a com- 
petitor out of business, the practice is held to lessen 
competition and hence to be unfair. For price cutting 
to be unfair, the seller must sell below his cost. Suppose 
that the Jones Company has a production cost of $1 per 
unit, and that the Smith Company has a cost of $1.25. 
If the Jones Company places its price at $1.10, it is not 
selling below cost but is nevertheless making it very hard 
for the Smith Company to compete. The Smith Com- 
pany must sell at a loss, quit business, or reduce its costs. 
It is in a very unpleasant position. Nevertheless, under 
the competitive system, Jones may undersell Smith to 
get the business, and Smith is supposed to drop out if he 
is unable to reduce his costs. 

Let us consider a different situation. Suppose that 
Brown & Company has a cost of $1.10 and that it is very 
much larger than the Jones Company, whom it wishes 
to put out of business. Brown & Company therefore 
places its price at 90^ . It knows that it will take a loss. 



572 Business Ethics 

but it has more capital than the Jones Company and can 
afford to take a loss until the Jones Company is ruined 
and driven out of business. This is clearly unfair, un- 
ethical, and an illegal procedure. Competition on prices 
is perfectly fair, but when one seller sells below his own 
production cost with the object of driving competitors 
out of business, it is unfair. 

Boycotts. A boycott is a combination of people with 
the purpose of refusing to deal with a given person. 
Groups of wholesalers have been known to agree to refuse 
to buy from a manufacturer who sold to the retailers. 
Boycotts are unethical and illegal. 

Exclusive contracts. Sellers frequently offer the deal- 
ers exclusive agencies, the free lease of equipment, or 
special prices, rebates, or refunds if the dealers will agree 
not to handle the products of competing sellers. Such 
a practice is very likely to prevent competing sellers from 
securing outlets for their good and so result in lessening 
competition. In such a case the practice is unfair. 

Unfair competition under the NRA. In 1933 Con- 
gress passed the National Industrial Recovery Act which 
was in force until it was declared unconstitutional by the 
Supreme Court in 1935. Under this Act some 700 trade 
groups or associations formulated codes of fair compe- 
tition which were approved by the National Recovery 
Administration. These codes denounced many unfair 
practices, such as inaccurate advertising, misrepresenta- 
tion of goods, the giving of free goods and secret allow- 
ances, disparagement of competitors 7 goods, full-line 
forcing, procuring trade secrets, promoting breach of con- 
tracts, unauthorized use of trademarks, unauthorized sub- 
stitution of goods, and unreasonable cancellation of 
contracts. Most of these practices were already held to 
be unfair under the Federal Trade Commission Act. 



Business Ethics 573 

The main provisions of these codes, however, had to 
do with establishing minimum wages and maximum hours 
for employees and with trying to limit competition and 
control prices by employers. In order to control prices, 
several codes attempted to control or limit production. 
Code provisions limiting competition and controlling sup- 
ply and prices were unfair under the theory and law of 
competition as generally understood in the United States. 

Conclusions. Free competition has been limited by 
large or monopolistic companies and by agreements and 
understandings existing between competitors. Many 
European countries have allowed competition to be lim- 
ited by agreements by "cartels" (a form of trade associa- 
tion). Many have advocated that the United States 
forsake its theory of free competition and adopt that of 
controlled, or regulated, monopoly. But there are many 
advantages to a system of open and free markets. Be- 
fore we adopt a system of regulated monopoly, the author 
would like to see a sincere and aggressive attempt made 
to break up monopolies and enforce free competition. 
He feels that such an effort on the part of the national 
and state governments, backed up by a strong public 
opinion, will be successful, and that it will secure many 
advantages that cannot be secured under a system of in- 
dustry controlled by either trade groups or government. 

Chapter 35 

Review Questions 

1. What is meant by business ethics? 

2. Is business conducted along more or less ethical lines 
than 25 years ago? What evidence can you cite to prove your 
answer? 

3. Why does business need rules and umpires? 



574 Business Ethics 

4. Name as many agencies as you can that are working 
for higher ethical standards in business. 

5. What is meant by codes of ethics? Is there any danger 
in such codes? 

6. What is meant by saying that ethical codes provide 
for higher standards of conduct than legal codes? 

7. What are Better Business Bureaus? What do they do? 

8. Who have taken the lead in organizing and supporting 
these bureaus? 

9. What are the "model," or "Printers' Ink," statutes? 

10. What is the Federal Trade Commission? How does it 
operate? 

11. What are trade practice conferences? 

12. What is unfair competition? Are methods of unfair 
competition illegal? 

13. Name some practices that are held to constitute un- 
fair competition. 

14. What is meant by deceiving the buyers? Are all 
methods of deceiving unethical? 

15. What was the defense and the decision in the Winsted 
Hosiery Case? 

16. What is meant by simulation of names? 

17. What is commercial bribery? Why is it unfair? 

18. Is it fair for a manufacturer to offer bonuses to the 
merchant's salesmen for the sale of the former's products? 

19. When is price cutting unfair? 

20. What is a boycott? 

21. What is meant by exclusive contracts? Why are they 
unfair? 

22. What were the chief provisions of the NRA codes? 

Thought Problems 

1. The old rule was that the buyer should beware. The 
new rule is that the buyer is not to be fooled nor deceived. 



Business Ethics 575 

How far should the courts go in protecting the buyers from 
their own ignorance and carelessness? 

2. What is meant by the statement "business is business"? 

3. What is meant by saying that "honesty is the best 
policy"? 

4. Is it true that honest business men are often forced to 
use dishonest practices because of unfair competitors? 

5. The Haywire Company manufactures furniture out 
of chestnut and gum wood which it covers with a thin coating 
of mahogany veneer. It advertises its product as mahogany. 
Is this fair? 

6. The Evcless Company manufactures furniture of soft 
wood and then stains the surface to resemble walnut. It 
marks its furniture American Walnut, Black Walnut, Red 
Walnut, and so forth. Is this unfair? 

7. The Coonskin Company advertises coats made of 
muskrat skins as Canadian Seal, Siberian Seal, and Hudson 
Bay Seal. Is this fair? 

8. A company located in New York State makes cigars 
from domestic tobacco which it sells as Havana cigars. It 
claims that Havana is a trade name used to denote its type 
of cigars. How about it? 

9. The NoKnock Knitting Mills Company shows a picture 
of a large factory on its stationery and on much of its adver- 
tising matter. It does not own or operate any mills. It is 
purely a selling company. Is it guilty of unethical or unfair 
competition? 



Index 



AAA, benefits of, 272, 274 
Abbot, Mcrkt & Co., 167, 168 
Abraham & Straus, Inc., 549 
Acquisitiveness, 451 
Action, securing: 

in display, 413 

in sale, 448, 462 
Advertised goods: 

as price leaders, 120 

demand for, 122 

price of, 121 
Advertising (Chs. 32, 33, 34) . 

and business cycles, 521 

and selling, 546 

appeals, 535 

by agencies, 522 

by chain stores, 195, 196 

by cooperative chains, 203-204, 
'210, 213 

by department stores, 170 

by mail-order houses, 174-175, 
177, 178, 180 

by rural stores, 149 

by small stores, 156 

by trading center stores, 151-152 

copy, 548, 557 

cost, 514, 516, 519, 522 

direct-mail, 174-175, 177, 178, 
180, 529-530 

headlines, 546, 547 

kinds of, 526 

mediums (Ch. 33), 527 

novelties, 531-532 

of services, 242-243 

outdoor, 530, 531 

photographs in, 546 

planning of, 523-524 



Advertising (continued) : 

policy, 516 

position in layout of, 543, 544 

radio, 531 
Advice : 

by brokers, 79 

giving, as part of selling func- 
tion, 19 
Affection as a buying motive, 451, 

459 

Agent (.sec also Brokers), 72 
Agricultural Adjustment Act, 271 
Agriculture (sec tarm) 
American Institute of Food Dis- 
tribution, Inc., 211 
Amusement, desire for, 451 
Apartment hotels, selling 

space in, 250 
Apartment houses, selling 

space in, 251 

Appeals, in advertising, 535 
Applications for positions as sales- 
men, 497 
Approach, the, in selling, 454, 455 

by retail salesmen, 471 
Arrangement of stores, (Ch. 24), 

363, 401 
Assembling, 46 

of farm products by retailers, 

146 

Attempts by cooperative associa- 
tions to reduce marketing 
costs, 264 
Attention, 448, 456 

attracting, by display, 413 
Auctions, (Ch. 6), 86, 91 

charges, 90 

psychology of, 87 



578 



Index 



Automobiles : 
as affecting trade of retail stores, 

147-150, 157, 180 
number, 29 

B 

Bad debts, 366, 368 
Bankruptcy, causes of, 442 
Base-surplus plan (for milk), 307 
Benjamin Franklin Hotel, adver- 
tisement of, 555 

Better Business Bureaus, 564, 565 
Bills of lading, 24, 25 
Bonds, selling of, 248, 249 
Bonuses : 

for salesmen, 507 

to buyers' salesmen, 570 
Boycotts, 572 
Brands, private, 119, 123 
Bread, cost of producing and dis- 
tributing, 7 

Brokers, (Ch. 5), 58, 60, 90, 224, 
258, 284, 311, 324 

advantages of, 78-81 

advice by, 79 

coal, 230 

earnings of, 78 
Budget, 426 
Bulk goods, 67 
Business : 

and distribution, 2 

conditions, 425 

cycles, 425, 426 
and advertising, 521 

ethics (Ch. 35), 560 

mortality, 437-444 

object of, not profit, 435 
Business Week, The, 397 
Butter, marketing of, 309, 311 
Buyers : 

finding, 19 

types of, 464, 465 
Buying, (Ch. 25), lft-17, 420 

and quality, 427 

brokers, 73 

by wholesaler, 111 

club, 206, 207 

function analyzed, 16, 17 

groups, 214, 217 



Buying (continued) : 
motives, 450, 451, 535, 536 
small-order, 376, 378 
reciprocity in, 430 



California Fruit Growers' Ex- 
change, 6 

Capital, uses of, 366 
Caples, John R., 546 
Capper, Arthur, Senator, 95 
Car cards, 533 
Cash-carry : 

retailers, 148, 191, 192, 203 
wholesalers, 114, 193 
Cash discount, 334 
Chain competition, meeting by in- 
dependent merchants, (Ch. 
12), 202 

Chain stores, (Ch. 11), 183 
Chase and Schlink, Your Money's 

Worth, 45 

Chicago Board of Trade, 93, 95 
Chicago Mercantile Exchange, 

93 
Classification : 

of commodities, 65 
plan, in buying milk, 305, 307 
Closing the sale, 476 
Clothing stores: 
failures, 437 
volume of sales per full-time 

salesman, 359 

Coal, marketing of, 225, 230 
Codes of ethics, 562 
Coffee, sugar, and cocoa ex- 
changes, 93 
Collections, 366, 368 
percentages, 367 
period, 357, 362, 366 
Color, in advertising, 413 
Commercial bribery, 569, 570 
Commission : 
merchants, 73, 74, 82, 83, 258, 

283, 293-294, 320-321 
method of paying salesmen, 505 
rates of, for brokers and com- 
mission merchants, 76 



Index 



579 



Commodities (see also Goods), 
175 

classification of, 65 
Commodity approach, 4, 48, 64 

advantages of, 5 

Commodity Exchange, Inc., 93 
Commodity exchanges, 92, 100 
Concentration, 51, 52 
and dispersion, of farm products, 

255 

of livestock, 289 
of milk, 302 

yards for livestock, 291, 292 
Conferences, trade practice, 566 
Confidence, in salesmen, 487, 488 
Consumers' goods, 66, 222 
Consumption : 

goods from farms, 256 
of cotton, 315 
of meat, 289 

Convenience goods, 66, 149, 150 
Cooperative : 
associations : 

attempts by, to reduce mar- 
keting costs, 264 
selling cotton, 321, 324 
selling giiun, 287, 288 
selling milk, 303 
shipping livestock, 290 
chains, 210, 217 

securing lower prices, 327 
delivery systems, 217 
marketing of farm products, 

263, 266 

Contracts, exclusive, 572 
Control of supply of farm prod- 
ucts, 260, 274 
Copy advertising, 548 
Corn, marketing of, 286, 287 
Cornflakes, cost of producing and 

distributing, 6, 7 
Corn-hog ratio, 295, 297 
Cost : 

incurred by risk, 50 
of advertising, 514, 516, 519, 522 
of distribution should be re- 
duced, 13 
of marketing: 
butter, 311 



Cost (continued) : 
cotton, 322 
livestock, 295 
milk, 309 
total, 9 
wheat, 285, 286 

of private and national brands, 
121 

of storage, 35 

of transportation, 23 

price, 333, 334 

replacement, 338 
Cotton: 

buying of, by the mills, 323-324 

gin, 319 

marketing, 315, 322 

merchants, 321 

mills, 315 

Country buyers, 290, 320 
Country elevators, 281-284 
Country shippers, 57 
Cream, marketing of, 302 
Creamery butter, 310 
Credit: 

bureaus, retailer-owned, 217 

by department stores, 166, 168 

by rural stores, 148 

by small stores, 156, 204 

by wholesalers, 114 

policy, 368 
Curiosity, 451 
Custodian warehousing, 40 
Customary prices, 328 
Customer frontage, 365, 411, 412 
Customers, drawing, deep into the 

store, 403 
Cut-price leaders: 

advertised goods used as, 120 

used by chain stores, 196 

used by cooperative chains, 203 

used by department stores, 171 
Cycles : 

business, 425, 426 

of production of farm products, 
262 

D 

Dairy products, marketing, (Ch. 
17), 301 



580 



Index 



Davidson System, 113 
Debenture plan, 270, 271 
Deception of buyers, 567, 568 
Delivery by wholesalers, 114 
Delivery vehicles and advertis- 
ing, 532 
Demand : 

changes in, 420, 426 

creation of, 18 

estimating, 420, 426 

for clothing, 316 

for farm products, 259, 265 
Demurrage, 25 
Department stores, 163, 174 

failures, 437 

margins, 346 

operating expenses and profit, 
346 

rent, 365 

stock turnover, expenses, and 

profit, 375 

Departure, by salesmen, 463, 464 
Desire, 448, 459, 460 

creation of, 474 

Diebold Safe & Lock Co., adver- 
tisement of, 554 
Direct-mail advertising, 174-175, 

177, 178, 180, 529-530 
Direct marketing of livestock, 292 
Discounts, trade, 334 (footnote) 
Dispersion, 51, 52 (see also Con- 
centration) 

of milk, 303 
Display : 

attracting attention by, 413 

cabinets, 410 

of goods, in retail stores, 363 

of stock, (Ch. 24), 401 

table, 408 

Distances traveled by farmers to 
purchase different types of 
goods, 150 
Distribution (Ch. 1): 

a part of business, 2 

a part of economics, 2 

Census, 165 

cost of, 6 

costs, why so high? 9, 12 

functions, 2, 15 



Distribution (continued) : 

interest in, 1 

meaning of, 1 

method and advertising, 516, 517 

methods of studying, 4 

object of, 3, 4 
Dividing, 46, 47, 58, 128 

by wholesaler, 111 
Dollar control, 397, 398 
Domestic allotment plan, 271 
Down-town retail stores, 152 
Drop shipper, 115, 116 
Drug store: ' 

cooperative chains, 213 

failures, 437, 439, 442 

wholesale sales per salesmen, 

359 
Dry goods stores, failure of, 437 

E 

Economic definition of profit, 433 
Efficiency : 

method of measuring, 350, 353 

operating, 349 

tests for merchandising, 357 
Eggs, trade channel for, 61 
Electricity, selling, 246, 247 
Elevators: 

country, 281-284 

terminal, 284-285 
Ely & Walker Dry Goods Co., 389 
Entertainment, selling of, 242-244. 
Enthusiasm of salesmen, 459, 488 
Equipment : 

obsolescence of, 222 

sale of, 225 

Ethics, business, (Ch. 35), 560 
Even prices, 328, 329 
Examinations for merchants, 444 
Exchanges (see also Commodity 

exchanges), 86 
Expenses, (Ch. 20), 322, 344 

and profits of department stores, 
169, 170 

and services, relation between, 
348 

and stock turnover, relation be- 
tween, 374-375 

classification of, 344, 345 



Index 



581 



Expenses (continued) : 
of chain stores, 18&-189, 192-193 
of department stores, 173, 346 
of hardware stores, 351 
of retailers, 133, 135, 137 
of wholesale merchants by size, 

118 

of wholesalers, 115, 117 
of wholesalers and retailers com- 
bined, 189 
variation in, 347, 349 



Fabricated parts, 233-234 
Facial expression of salesmen, 485 
Factors, 320, 321 
Failure, 436, 444 

causes of, 439, 443 
Farm: 

income, 267 

income for 1929 and 1933, 254- 

255 
products, 66, 256 

as consumption goods, 256 
as raw materials, 256 
assembling of, by retailers, 146 
control of supply of, 260 
cycles of production of, 262 
rail shipment of, 257-258 
marketing, (Chs. 15-18) 
relief, 267-275 
Farm Board, 269 
Farmers' market, 257 
Farmers National Grain Corpora- 
tion, 288 
Farming : 

one-crop versus mixed farming, 

254 

types of, 253 
Fashions, 422-424 
Fear: 

as a buying motive, 451 
in advertising, 536 
Federal Trade Commission, 121, 

188, 190, 211, 566, 570 
Federal Trade Commission Act, 

572 

Feeding the market, 265 
Field warehousing, 40 



Financial : 

risks, 48 

strength and advertising, 518 
Financing, 47 

of cotton growers, 317 
Flat price plan, in buying milk, 

305 

Freezing, quick, 36 
Freight containers, 26, 27 
Freight rates, carloads, 38 
Frontage, customer, 365 
Fruit auctions, 88, 90 
Full stocks, advantages of, 381- 

382 
Functional approach, 4 

advantages of, 5 

middlemen, 57, 58, 59 
Functions: 

of brokers, 76, 80 

of retailers, 127, 128 

of wholesalers, 110, 114 
Furniture stores, failure of, 437 

causes of, 441 
Future trading, 94-96 

G 

Garages, failure of, 437 
Gas, selling, 247 
General stores, 146 

failure of, 437 
Gin, cotton, 319 
Good Hardware, 410, 414 
Goods (see also Commodities), 

66 
marketing industrial, (Ch. 13), 

220 

misbranding of, 567 
selection of, by buying groups, 

214, 215 
sold by chain stores, sources of, 

188 

sold by mail, 175 
Government-licensed warehouses, 

42-43 

Grading, 46 

Grain, marketing of, 279, 288 
Grocers, retail, and sales per per- 
son, 358 



582 



Index 



Grocery stores: 

failure of, 439 

layout, 407, 411 
Group buying, 214, 217 

H 

Hardware stores: 

failures, 437, 439 

operating expenses and profits, 
351 

sales per person, 358 
Harvard Bureau of Business Re- 
search, 169, 189, 364 
Headline in advertising, 546, 547 
Health of salesmen, 486, 487 
Hedging, 98-100 
Hobby approach, 455 
Hoffman-Neill rule, 402 
Honesty by salesmen, 487 
Hotel service, selling, 249-250 



Illustrations in advertising, 546 

Importer, 60, 61 

Income (see also Profit), 433 

farm, 254, 255, 267 

of industrial workers, 267 
Independent retail stores, (Ch. 9), 

143, 206 
Industrial goods, 66 

marketing of, (Ch. 13), 220 
Initiative of salesmen, 489 
Institutional advertising, 526 
Institutional approach, 4 
Institutions, 56, 59 
Insurance, life, selling, 248-249 
Integrated and non-integrated 

stores, 133 
Integration, 62, 64 

of chain stores, 183, 184 
Interest, 448, 458, 459 

as an expense, 344 
Interviews : 

by salesmen, 472, 474 

securing, 453, 454 

to select salesmen, 498 
In-transit privileges, 25 
Inventory, annual, 390, 393 



Jobbers (see <7/,sr> Wholesalers), 57 
steel, 233 

K 

Kansas City Board of Trade, 93 
Knowledge needed by salesmen, 

482 

L 

Leaders, 171, 196 

price, 329, 330 

Lepis, Louis A., Inc., advertise- 
ment of, 556 
Liability : 

for injury, 48 

of loss of key man, 49 

on common carriers, 24 

on contracts, 48 
Lighting stores and windows, 415, 

417 

List price, 334 
Livestock : 

buyers, 290 

marketing of, 288-297 
Location : 

and expenses of retailers, 136 

and expenses of wholesalers, 119 

and rent, 401, 402 

of chain stores, 196 

of department stores, 171 

of stores, 364 
Lodgings, selling, 249-251 
Low prices, 327, 328 
Luther, A. J., & Co., 408 

M 

Macy, R. H., & Co., 545 
Magazine advertising, 528 
Mail-order house, 174-180 
Mail-order wholesaler, 116 
Management of marketing enter- 
prises, 51 
Mandel Bros., 164 
Manufacturers' agents, 74 
Margin, 335, 336-337 
and stock turnover, 375 
affected by rate of stock turn- 
over, 383 



Index 



583 



Margin (continued) : 
average, 339 
of department stores, 169, 170, 

346 

variation in, 339 
Marginal dealing, 96 
Mark-downs, 335, 336 
and stock turnover, 374 
effect of, 337 
Marketing: 
costs : 

attempts by cooperative as- 
sociations to reduce, 264 
have they increased? 11 
why so high? 9, 12 
enterprises, management of, 51 
functions, (Ch. 2), 2, 15 
interest in, 1 
methods, 256, 257 
Mark-up, 332, 333 

percentage, 335, 336 
Mass display, 413 
McGraw-Hill Book Co., Inc , 484 
Meat, consumption of, 288, 289 
Meat stores, failures, 437 
Mediums, advertising, 527 
Merchandise brokers, 74, 81 
Merchants, 57 
cotton, 321 

independent, meeting of chain 
competition by, (Ch 12), 202 
Middlemen, 56, 59 
approach, 4 

advantages of, 5, 6 
handling industrial goods, types 
of goods and sales of, 226, 227 
kinds of, 56 
types of, handling equipment, 

224, 225 

Milk, marketing of, 301-309 
Minneapolis Chamber of Com- 
merce, 93 
Minor point, closing sale on, 462- 

463 

Misbranding of goods, 567 
Model stock, 388, 390 
Montgomery Ward & Co., 174 
Mortality (see also Failure), 437 
Motor trucks (see also Trucks), 27 



Mutual wholesalers, 116, 210 

N 

National brands, cost of, 121 
National Retail Hardware Asso- 
ciation, 206, 351, 402, 404, 436 
Natural classification of expenses, 

345 

Negotiating terms, 19 
Neighborhood and suburban retail 

stores, 156, 157 

New Orleans Cotton Exchange, 93 
Newspapers, as advertising me- 
dium, 527 

New York City, 379, 484 
New York Cotton Exchange, 93 
New York Mercantile Exchange, 

93 

New York Times, The, 545, 549 
Novelties in advertising, 531-532 
NRA: 
code, wages for truck drivers 

under, 28 

unfair competition under, 572 
Nystrom, Paul, 395, 438, 440 

0' 

Oakland Tribune, advertisement 

of, 551 

Objections, how to meet, 460 
Obsolescence of equipment, 222 
Odd prices, 328 
One-price policy, 330-331 
Operating : 
expenses, 344 

classification of, 345 
results of retail hardware stores, 

351 

statement, 345, 347 
supplies, 225 
Oranges, cost of producing and 

distributing, 6 
Order bill of lading, 25 
Order buyers, 294 
Ordering and buying, 422 
Orderly marketing, 265 

for cotton, 323 

Order-taking versus salesmanship, 
448 



584 



Index 



Organization of: 
chain stores, 186-188 
department stores, 166 
sales department, 507-508 

Outdoor advertising, 530, 531 

Ownership risks, 48 



Packages, as advertising medium, 

532 

Packing, 43 

Pan-American Trademark Confer- 
ence, 567 

Patronage dividends, 263 
Pay and salesmanship, 362 
Paying salesmen, 503-507 
Pennsylvania Railroad, 26, 108 
Perpetual inventory, 393-397 
Perseverance by salesmen, 487 
Personality of salesmen, 485 
Photographs, in advertising, 546 
Planning, in advertising, 523-524 
Pooling, 265 

cotton, 323 

Position, in layout of advertise- 
ments, 543, 544 
Preapproach, 451-453, 470 
Price, 327-332 

advertising, 526 

agreements among competitors, 
567 
and unfair competition, 571 

flat, plan for milk, 305 

future, 428 

lower, and stock turnover, 382 

obtained by: 
buying groups, 215-217 
cooperative chains, 212 

of cash-carry wholesalers, 327 

of corn, 287 

of farm products, 259-266 
forecasting, 261-263 

of private brands, 120, 121 

of wheat, 285 

paid by chains, 190 

prevailing, 428 

selling by chains, 190 

stabilizing, 265 
Pride, as a buying motive, 451, 459 



Printers' Ink, 565, 570 
Printers' Ink Statutes, 565 
Private brands, 119, 123 

cost of, 121 
Processing tax, 272 
Product advertising, 517, 526 
Production cycles of farm prod- 
ucts, 262 

Professional services, selling, 244 
Profit, (Ch. 26), 433 

affected by rate of stock turn- 
over, 383 

and stock turnover, 375 

average, 435, 436 

economic definition of, 433 

motive, 451 

of brokers, 78 

of department stores, 169, 170, 
346 

of hardware stores, 351 

of rural dealers, 435-436 

proper basis of, 434 

variation in, 434, 435 
Progressive Grocer, The, 154, 155, 

349 (footnote), 405, 407, 411 
Psychology of auctions, 87 
Publicity, 533 
Public opinion and chain stores, 

197-198 

Public sales (see also Auctions), 86 
Public warehouses, 39 

charges of, 42 

liability of, 41 

Purchasing agent, work of, 429- 
430 



Quality : 
and buying, 427 
and private brands, 120 

Quick freezing, 36 

R 

Radio advertising, 531 
Rail shipment of farm products, 

257-258 

Rates of stock turnover, 383 
Raw materials, 231 
from farms, 256 



Index 



585 



Reciprocity in buying, 430 
Reconsignment, 25 
Red Barrel, The, 139 
References for salesmen, 499 
Rent: 
divided according to parts of 

store, 401, 402 
of stores, 363 
per square foot, 365 
Replacement costs, 338 
Resale price maintenance, 567 
Research Bureau of Retail Train- 
ing, University of Pittsburgh, 
484 

Research by retailers, 205 
Resident buyers, 73 
Restaurants, failures, 437 
Retail : 

sales according to location of 

stores, 145 
salesmanship, 469 
salesmen, 449 
selling, problems in, 469 
stores : 

display of goods in, 363 
neighborhood and suburban, 

156, 157 
rural, 145, 151 
Retailer-owned wholesale houses, 

207-210 
Retailers, 58 

assembling of farm products by, 

146 

types of, 130 

Retailing, (Chs. 8-12), 127 
Retail Research Association, 206 
Risk, 128 

and storage, 35 
guarding against, 50 
increases marketing costs, 50 
shifting, 49 
why assumed, 49 
Risking, 47, 50 
Ronald Press Co., 484 
Rothschild, Maurice L., advertise- 
ment of, 553 

Rules in business, need for, 561 
Rural dealers, profits of, 435-436 



Rural retail stores, 145, 151 



Salary and commission method of 

paying salesmen, 506-507 
Salary method of paying salesmen, 

503-505 

Sales (.sre also Volume) : 
agents, 72, 73 

selling coal, 230 
and advertising, 519 
department : 

duties of, 496 

organization of, 407, 508 
increasing, 382 
irregular, 360, 361 
of retail stores by location, 145 
per person, 357, 362 
per salesman, 358, 359 
per square foot of space, 357, 

362, 364 
retail : 

per person, 360 

volume of, 128 
size of, 362-363 
talk, construction of, 465-466 
talks, value of, 466-467 
training, 362 

Sales management, (Ch. 31), 496 
Salesmanship, (Chs. 27-29), 362 
necessity for, 449 
principles of, 447 
rating of, 475 
retail, (Ch. 29), 469 
versus order-taking, 448 
Salesmen : 
applications for positions as, 

497 

hiring of, 496 
methods of paying, 503-507 
securing information, 483' 
specialty, 112-113 
stimulating, 502-503 
supervising, 501 
training, 499-501 
types of, 449 

needed for industrial goods, 

235 
volume of sales, 358, 359 



586 



Index 



Sales talk, (Ch. 28), 458 
Sample, sale by, 94 
Sample Census, 165 
Sears, Roebuck & Co., 174 
Securing information, by salesmen, 

483 

Selecting salesmen, 497-498 
Self-service stores, 158-159 
Selling (see also under separate 
articles and services) : 

by telephone, 477 

function, 17, 19 

service, (Ch. 14), 239 

success in, 481 

suggestive, 476 
Selling agents, (Ch. 5), 72 
Semi-jobber, 116 
Service (see also Functions) : 

and expense, 348 

as an element in cost, 10 

functions involved in distribu- 
tion, 15 

of chains, 194 

of department stores, 168, 169, 
173 

of passenger automobiles, 29 

performed by : 
motor trucks, 27 
railroads, 23 

Shape of advertisements, 542-543 
Shirts, model stock of, 389 
Shoes, cost of producing and dis- 
tributing, 8 

Shoe stores, failure of, 439 
Shopping goods, 67, 145, 150 
Short selling, 96-97 
Sincerity of salesmen, 489 
Size: 

and expense of retailers, 137, 
138 

and expense of wholesalers, 117 

of advertising, 541 

of sales, 362, 363 

use of, in display, 413 
Size-up, by salesmen, 471 
Small-order buying, 376 
Small retail stores, 138-140 

problems of, 143, 144 



Specialization, by retail stores, 

153-154 

Specialty salesmen, 112, 113, 449 
Speculation, 96-98 
Spot sales, 94 
Stage of distribution, 62 
Standardizing, 43 
Standards : 

uniform, 44 

wastes caused by lack of, 44-46 
Steel: 

jobbers, 233 

marketing of, 231-233 
Steward, A. T., 331 
Stimulating salesmen, 502-503 
Stock : 

arrangement, (Ch. 24), 401 

fewer items in, 378, 381 
Stookkeeping, (Ch 23), 388 

systems, 390, 398 
Stock turnover, (Ch. 22), 

and profit, 375 

by chain stores, 194, 195 

how computed, 373 

rates of, 383 

Stockyard, picture of, 293 
Storage, (Ch. 3), 33-43 

cost of, 35 

facilities, 39 

influence of, on prices, 33, 43 

kinds of, 35-36 

whore goods should be stored, 
36-38 

who should store, 38-39 
Stores: 

arrangement of, (Ch. 24), 363, 
401 

lighting of, 415 

Storing, by wholesalers, 110, 111 
Straight bill of lading, 25 
Subsidy on farm products, 269-270 
Substitution, by salesmen, 474 
Success in selling, (Ch. 30), 481 
Suggestive selling, 476 
Supervision: 

of chain stores, 188 

of cooperative groups of re- 
tailers, 205 
Supplies, sale of, 225 



Index 



587 



Supply : 

finding sources of, 17 
of farm products, 259 

Swenscn, Dorothy E., 549 

System, 438 



Tables, display, 408, 409 
Tact, needed by salesmen, 490 
Tariffs on farm products, 268 
Telephone, selling by, 477 
Telephone and telegraph service, 

selling, 248 

Terminal elevators, 284-285 
Terms of sale, negotiation of, 

17-19 
Territories : 

and advertising, 518 

for salesmen, 508 
Testimonials, 459 
Tests, trade and intelligence, 499 
Thrift, selling, 248, 249 
Tickler system, 391-393 
Title, obtaining, 17 
Town, size of, and retail ex- 
penses, 136 
Trade channels, 59-64 

for butter, 311 

place of broker in, 77 

place of wholesaler in, 103 
Trade discounts, 334 (footnote) 
Trade paper advertising, 528, 529 
Trade practice conferences, 566 
Traffic, volume moved by various 

carriers, 23 

Training salesmen, 499-501 
Transportation, 19-29 

and storage, competition in, 36 

as an clement in marketing 
cost, 10 

by trucks, 27-29 

cost of, 23 

methods of, 20 

our system, 21 

selling, 245-246 
Trucks : 

hauling milk, 302 

in shipping of: 

farm products, 257-258 



Trucks (continued} : 

livestock, 291 
transportation by, 27-29 
Truck wholesalers, 115 
Turnover increases profit, 384 
Types of middlemen, 56 

U 

Unfair competition, 566 

Uniform standards, 44 

Unit control^ 383-397 

U. S. Chamber of Commerce, 402, 

404, 407, 408, 411, 425, 562 
U. S. Department of Agriculture, 

90, 257, 281, 290, 310, 319 
U. S. Department of Commerce, 

215 
Utility: 

defined, 2-3 

form, 2 

place, 2, 19 

possession, 2 

time, 2, 33 



Vending machines, 258 

Vendor-tie-ups, 210 

Village store, advertising methods, 

534 

Volume (see also Sales) : 
of brokerage business, 75 
of business of chains, 185 
of business of selected service 

industries, 241 

of business of various types of 
middlemen handling indus- 
trial goods, 226, 227 
of chain store business, 1933, 

187 

of mail-order business, 176 
of retail business, 128-130 
of sales of department stores, 

165, 166 

of sales of retail stores located 
in towns of different sizes, 153 
of sales of retail stores of va- 
rious types, 131 
of sales of retail stores operated 
in different ways, 332 



588 



Index 



Volume (continued) : 

of wholesale trade, 105, 106 
Voluntary chains (see Coopera- 
tive: chains) 

W 

Wagon goods, 67 
Wagon-wholesalers, 115 
Waldorf-Astoria, advertisement of, 

552 

Wallace, IT. A., 287 
Wall fixtures, 409 
Wanamaker, John, 331, 560 
Wants, expansion of, 3-4 
Warehouses : 

government-licensed, 42-43 

newer type of layout for whole- 
saler, 113 
Water carriers, 22 
Weather : 

and demand, 424 

cycles, 242 

risks, 49 



Wheat, marketing of, 279-289 
Wholesale : 

expenses, 105 

functions, 110 

merchants, 107 

salesmen, 449 
Wholesaler-retailer cooperative 

chains, 210-211 
Wholesalers, (Ch. 7), 57, 103 

coal, 230 

delivery by, 114 

mutual, 210 

retailer-owned, 207-210 

steel, 233 
Window : 

display, 412 

lighting, 415-416 
Windows, types of, 412-413 



Yard traders, 294, 295